An Act respecting duties on transfers of immovables10 (the “Act”) requires that municipalities collect duties on the transfer of any immovable property situated within their territory. The basis of imposition for transfer duties shall be the greatest of the following:
- the amount of the consideration furnished for the transfer of the immovable;
- the amount of the consideration stipulated for the transfer of the immovable;
- the amount of the market value of the immovable at the time of its transfer.11
The Act defines a transfer as being “the transfer of the right of ownership on a property, the establishment of emphyteusis and the transfer of the rights of the emphyteutic lessee (…).”12 The market value is based on the value on the property assessment roll.
In the case of emphyteusis, there are a number of legal transactions that will make the transferee subject to the payment of transfer duties: (i) the establishment of the emphyteusis; (ii) the assignment of the emphyteutic lessee’s rights; (iii) the assignment of the bare owner’s rights to the immovable property; and (iv) the emphyteutic lessee’s purchase of the bare owner’s rights.13
The said legal transactions constitute a dismemberment of the right of ownership or a transfer thereof, not a transfer of the full right of ownership. Accordingly, can one apply as a basis of imposition the amount of the immovable property’s market value regardless of the fact that the transfer dealt with only a portion rather than the entire right of ownership and is it reasonable to do so? Conversely, should the basis be strictly the amount of the consideration furnished or stipulated, which would then constitute a fairer market value for the right that was transferred?
Not many decisions have dealt with the applicable basis of imposition in the case of emphyteusis, either when it is established, when the emphyteutic lessee’s rights are assigned, or when the bare owner’s rights to the immovable property are assigned.
The Superior Court decision, 4053532 Canada Inc. c Longueuil (Ville de)14, which is not available in the various databases, deals directly with this question.
On June 23, 2008, the plaintiff, 4053532 Canada Inc., purchased the rights as “emphyteutic lessor” to three immovable properties located in the City of Longueuil for an amount of $4,200,000. According to the municipal assessment, the total value of those properties amounted to $32,593,029. In April 2009, the plaintiff received a statement of account from the City of Longueuil, the defendant, charging it transfer duties calculated on the market value of the properties.
In its motion to institute proceedings, the plaintiff asked the court to cancel the tax accounts issued by the City of Longueuil, contending that the assignment of the rights of the bare owner did not constitute a transfer as defined in the Act. Subsidiarily, the City of Longueuil should not have charged transfer duties based on the market value of the properties, but rather based on the consideration paid.
The court ruled that it was not necessary for the Act to explicitly state that the assignment of the owner’s residual rights is a transfer under the Act. Given that the essence of the right of ownership remains with the bare owner, the wording “transfer of the right of ownership” in the definition of transfer covers such a transaction.
As for the basis of imposition for the transfer duties, the court was of the opinion that the Act leaves little leeway to the City of Longueuil, which must choose the higher of the consideration furnished, the stipulated consideration, or the market value according to the property assessment roll. The court was of the opinion that the legislature had expressed itself clearly in wanting the transfer duties on the transfer of the bare owner’s residual rights to be determinable on the basis of the calculation stipulated in the Act, namely the market value of the immovable property:
“ [TRANSLATION] The immovable which must constitute, at the time of its transfer, a unit of assessment entered on the roll, is the one that is the subject of one of the transactions described in the definition of transfer found in section 1, namely the transfer of the right of ownership, the establishment of emphyteusis, the assignment of the rights of the emphyteutic lessee or the lease of a property for longer than 40 years. The real value of the rights transferred pursuant to those transactions becomes irrelevant where that value is lower than the market value as understood in section 1.1 of the Act.
 However, as Madam Justice Mailhot indicated in Racine c Québec (Ville de), the fact that transfer duties can be borne both upon the assignment of the rights of the emphyteutic lessee and upon the sale of the owner’s residual rights is not aberrant since the Act does not limit the number of transactions to which an immovable property may be subject.
 In addition, as mentioned by Mr. Justice Baudoin in Orford (Corp. municipale du canton d’) c 2850‐1799 Québec Inc., with respect to the current section 1.1 of the Act ‘an unequivocal legislative will is sufficient to transform a potential inequity into a rule of law’.”15
Thus, the court dismissed the plaintiff’s argument that the amount selected as the basis of the transfer duties should be the amount of the stipulated consideration rather than the market value.
According to the court, the immovable property that constitutes a unit of assessment entered on the roll when it is transferred is the one that is the subject of one of the transactions described in the Act’s definition of transfer. The real value of the rights transferred pursuant to those transactions becomes irrelevant where it is lower than the market value of the immovable property.
The fact that transfer duties can be charged on both the assignment of the rights of the emphyteutic lessee and on the sale of the bare owner’s rights is not aberrant, since the Act does not limit the number of transactions on an immovable property.
According to the court, an unequivocal legislative intent is enough to transform a potential inequity into a rule of law. In that regard, the court noted that other provisions of that nature have been enacted by the legislature, such as Article 1205 of the Civil Code of Québec and An Act respecting municipal taxation16, which require that the emphyteutic lessee be responsible for the real property charges during the term of the emphyteusis.
All in all, the court does not have the latitude to enable it to refuse to apply the legislature’s clearly expressed intent. Moreover, the court also refused to cancel the assessments as a result of changes made to the property assessment roll.
The case of 4053532 Canada Inc. c Longueuil (Ville de) was appealed, but a decision is still pending. Even if the decision rules on the value to be considered for the calculation of transfer duties, the legislature’s decision to allow the double, or even triple, imposition of transfer duties on the full market value of the immovable property is still questionable.
The following graph illustrates the fluctuation in the value of the rights of the emphyteutic lessee and the bare owner over the elapsed term of the emphyteusis:
Click here to view graph.
The case of 4053532 Canada Inc. c Longueuil (Ville de) has established that regardless of the elapsed term or remaining term of the emphyteusis, any assignment will require the payment of transfer duties on the total value of the property. On that point, as set out above, the court noted that other such provisions have also been enacted by the legislature with respect to the real property charges encumbering an immovable property, for which the emphyteutic lessee must be fully responsible during the term of the emphyteusis. However, it seems that court would have failed to take into account in its analysis that those provisions clearly establish that only the emphyteutic lessee is responsible for the real property charges.
Under the current state of the law, in the event of a simultaneous assignment of the rights of the bare owner and the emphyteutic lessee, with 50% of the term of the emphyteusis having elapsed, the emphyteutic lessee and bare owner will each pay transfer duties on the total market value of the immovable property. While it is true that the Act does not limit the number of transactions on an immovable property, it seems reasonable to us to think that it should nevertheless provide for fair transfer duties that do not constitute double taxation. Thus, we are of the opinion that the elapsed term or remaining term of the emphyteusis should be taken into account in the calculation of the property’s market value.
Another example of how the Act shows little consideration for the situation of emphyteusis is the fact that if the emphyteutic lessee decides to perfect his right and purchase the rights of the bare owner, he must then pay transfer duties to the municipality, although he already paid duties when the emphyteusis was established. On this point, the jurisprudence implies that the market value that would apply to the transaction would be that of the land and the building built by the emphyteutic lessee, not just that of the land.17
In H.L.P. société en commandites c Beauport (ville de)18, the Court of Appeal determined that during the term of the emphyteusis, the emphyteutic lessee is not the superficial owner of the works it has built and that it enjoys the erected building not under a right of accession, but because the emphyteutic contract entails that legal consequence.
Accordingly, if the emphyteutic lessee were to acquire the rights of the bare owner, there would be a transfer of not only the right of ownership to the land, but also to the structures that were built. However, the doctrine seems to disagree with this position. Indeed, according to several authors, the emphyteutic lessee has a temporary right of ownership to the new capital assets that were built, similar to a superficial ownership.19 Therefore there would be no transfer of ownership to those capital assets and the emphyteutic lessee should not have to pay transfer duties on the capital assets.
In conclusion, a legislative amendment that would put an end to the inequity caused by the imposition of transfer duties on emphyteutic transactions would be welcome. Indeed, the current state of the law could even discourage potential investors, who would not be interested in investing in the establishment of an emphyteusis since the sums to be paid to the municipalities in transfer duties are higher than the real market value, as that term is commonly understood, and can constitute double taxation.