In an important judgment1 on the interpretation of Section 19(d) of An Act respecting duties on transfers of immovables (the "Act"), the Quebec Court of Appeal has concluded that a limited partnership does not constitute a legal person for the purpose of the Act and that such a partnership cannot benefit from the exemption of the payment of duties on transfers of immovables under said section.
The main facts
By Deed of Sale, Polyclinique Médicale Fabreville Inc., a company, purchased an immovable from Polyclinique Médicale Fabreville, s.e.c. (Polyclinic), a limited partnership. These two entities being wholly controlled by Guy Nadeau et Réjean Chabot Inc., the deed of sale provides that there is an exemption of the payment of transfer duties under Section 19(d) of the Act which applies when the transfer is made between two closely related legal persons. The Act does not define the expression "legal person".
Claiming that a limited partnership is not a legal person within the meaning of the Act and that therefore this exemption does not apply to limited partnerships, Ville de Laval demands the payment of transfer duties further to this transfer. Polyclinic believes that a limited partnership is a legal person within the meaning of the Act and pleads moreover that the object of the Act is to grant an exemption from the payment of transfer duties when there is no significant change of patrimony. The Superior Court, in a judgment rendered June 13, 2006, agreed with Polyclinic and Ville de Laval appealed.
Decision of the Court of Appeal
As part of its decision, the Court of Appeal reviewed each of the main arguments pleaded by Polyclinic. The first argument is that a limited partnership is a legal person within the meaning of the Act. Acknowledging that the Act does not define the expression "legal person", the Court considers that the second paragraph of Section 19 of the Act that refers to the holding of issued shares of the capital stock of a legal person, deals with a company. Moreover, the Court cites Article 2188 of the Civil Code of Quebec, which expressly states that only joint-stock companies are legal persons. It therefore concludes that: "A limited partnership, like any other partnership, has its own patrimony, which, as long as it is sufficient, is separate from that of its partners; it therefore has its own patrimony without being a legal person within the meaning of the Act." [Our emphasis]
Secondly, the Court of Appeal considers the argument that there was no significant change of patrimony. This argument is based on the following extract of the Doucet v. Saint-Jean-sur-Richelieu (Municipalité de)2 decision:
"The Act grants an exemption of this tax when, among other things, the transfer is not made at arm's length meaning that the right of ownership is transferred between two closely related persons. This exemption applies because the transaction does not then represent a significant change of patrimony. […]". [Our emphasis] [Translation]
However, the Court concludes that this does not create a rule of intervention each time a case not covered by Section 19 is a case where there is no significant change in patrimony. Believing that it is up to the legislator to intervene if it considers that the exemptions listed under Section 19 of the Act should be extended, the Court of Appeal dismisses the arguments presented by Polyclinic and states that it will not benefit from an exemption of the payment of transfer duties provided for in the Act.
The primary interest of this decision rests in the fact that it would be logical to believe that the legislator's intention was to relieve from payment of the transfer duties any natural or legal person for which this transfer did not ultimately constitute a change in patrimony, no matter the type of entity party to the transaction. Therefore, believing that it cannot supersede the legislator, the Court of Appeal concluded that when a limited partnership is involved in the transfer of an immovable as a transferee, it cannot benefit from the exemption provided for under Section 19(d) of the Act in favour of closely related legal persons. It will be interesting to see if the legislator will decide to amend the Act in order to extend the application of Section 19(d) to limited partnerships or if it will prefer to adhere to the interpretation of the Court of Appeal in this judgment.
For the time being, related party transactions shall have to be structured to avoid, whenever possible and considering the parties' other objectives, any transfer involving a limited partnership in order to benefit from the exemptions provided for under Section 19 of the Act and avoid the payment of transfer duties.
Moreover, in the past, many enterprises that thought they could benefit from this exemption in restructurings involving limited partnerships, could be assessed for the payment of transfer duties by the concerned city or municipality. Hence, it must be noted that the prescription for this type of transaction is three years as of the registration of the transfer. Therefore, a city or municipality could send a notice of assessment if the registration of the transfer took place within the last three years.