The sale of real property in Quebec is never something that should be undertaken without regard to all the tax consequences. There are income tax issues, as well as sales taxes that should be considered. Furthermore, you should never ignore the application of Land Transfer taxes on any transaction.
Land Transfer taxes are imposed under the Act Respecting Duties on Transfers of Immoveables (“the Act”) and are invoiced to the purchaser by the relevant municipality after the registration of the deed of transfer. The rates range from 0.5% to 1.5%, but Montreal’s highest rate is 2%, applying on transfers of more than $500,000.
The question I most often have to deal with in my practice is whether any of the exemptions for land transfer taxes will apply to a given transaction. Transfers among parents and children and between spouses are generally exempt under section 20 of the Act. Transfers among siblings are not exempt.
Exemptions involving corporations are found in section 19 of the Act, and are applicable, inter alia, under the following situations:
- where the transferee is a new corporation resulting from the amalgamation of several corporations;
- where the transfer is made by an individual to a corporation of which at least 90% of the issued voting stock is owned by such transferor immediately after the transfer;
- where the transfer is made by a corporation to an individual, if such person is, immediately before the transfer, the owner of at least 90% of the voting stock of the transferor;
- where the transfer is made between two closely related corporations. For the purposes of this exemption, two corporations are closely related where there is at least a 90% ownership of voting shares between the two corporations or their subsidiaries. For example, this opens the door for exemptions between sister corporations where they are both owned by a single holding company.
Notably, sister corporations owned by individual shareholders would not qualify for the exemption.
There is a provision directly relating to the above that is (weirdly) not contained in the above Act, but rather in section 1129.29 the Quebec Taxation Act. Essentially, it is an anti-avoidance provision that prevents taxpayers from simply issuing 90% voting shares to the transferor of property to avoid the land transfer taxes and then immediately thereafter extinguishing the shares.
It provides that any time control has been acquired within 24 months after the transfer of property to a corporation, and where it may reasonably be considered that the property was transferred in contemplation of the acquisition of control , then the corporation will be liable for 125% of the land transfer taxes that would have been payable.
It should be noted that there is no exemption in the Act for transfers to partnerships. However, in the case of Statour v. Bromont, the courts went beyond the precise letter of the law. This case involved the transfer of property between two partnerships, both of which were controlled by the same company. In effect, the court viewed the partnerships as corporations and, because the ultimate parent corporation remained the at all times the beneficial owner of the property, allowed the exemption.
In the case of Productions Merveilles Inc. v. Montreal, the court did not stretch the law any further. This case involved the transfer of property between a corporation owned by one spouse and a partnership with both spouses as its partners. The court refused to view the two companies as being closely related under the law.
As we can see, the rules governing these tax exemptions appear strict, and in some ways illogical, but the courts seem to make an effort at times to infuse them with some common sense. No transfer of real property in Quebec should be made without considering these rules.