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Quebec announced in the March 2016 provincial budget that effective March 18, 2016, duties (at rates that remain unchanged of 1.5% at the top rate, or a top rate of 2.5% for properties in the City of Montreal) on the transfer of immovables (commonly referred to as “mutations tax” based upon the terminology in the French language version of the legislation) will now be payable in relation to off-title or unregistered transfers of immovable property (real estate). I will briefly describe the new rules for off-title transfers, and also refer to previous case law (apparently untouched by the budget) that suggests that a group of persons owning real estate through a partnership (rather than a co-ownership) possibly shields them from mutations tax in certain situations. Quebec also announced at the same time a narrowing of some of the exemptions to the payment of mutations tax, which I will also refer to.

In a nutshell, the following describes the background leading to the budget changes, and the major aspects of the changes:

− The main legislation dealing with mutations tax (Quebec’s Act respecting duties on transfers of immovables) has essentially provided that a municipality can collect mutations tax after a deed constituting the transfer of an immovable is registered at the land registry office. Therefore, in cases when a deed constituting true ownership (aka, beneficial ownership in the common law provinces) was not registered and a prête-nom or mandatary/agent was used on title (for any number of reasons, such as privacy concerns, convenience, or possibly with a goal of saving the mutations tax), there was the possibility of an effective off-title transfer of ownership between the parties (which would be reported and taxed for income tax purposes) that would not be subject to mutations tax. Ontario legislated on this in 1989, when its equivalent to mutations tax (called land transfer tax) was amended to apply land transfer tax to transfers of beneficial ownership in addition to transfers of registered ownership.

− Quebec is now taking an approach similar to Ontario’s, in that Quebec’s new rules are that mutations tax is henceforth payable as of the date that an immovable is transferred, whether off-title or on-title, rather than only when the transfer is registered. For registered transfers, the registry office will continue to inform the municipality of the transfer, and the municipality will send to the transferee in due course a bill for mutations tax. For unregistered transfers, the transferee now has an obligation to inform the municipality by written notice within 90 days that the transfer has occurred, and the municipality then sends the mutations tax bill. (Compare to the Ontario rule, where a payment is required even earlier, as the transferee of unregistered beneficial ownership must self-assess and pay land transfer tax to the province within thirty (30) days of the transfer.) It appears that even unregistered transfers that fall under an exemption to the mutations tax must nevertheless be reported to the municipality under this process;

− If a transferee of off-title ownership in Quebec does not provide notification of the transfer within the abovementioned 90 days, a 50% penalty (a “special duty”) applies to the mutations tax, and interest begins to run. The penalty may be reduced to 25% through Quebec’s voluntary disclosure program. This penalty for non-notification also appears to apply if there is no mutations tax otherwise payable due to the transfer being exempt from the tax (with the penalty in such a case apparently calculated in relation to what the mutations tax would have been had there been no exemption);

− Off-title transfers made prior to this change in the law should be shielded from mutations tax (subject theoretically to an anti-avoidance rule that has always been part of the law but which to date seems not to have been the subject of a material reported decision), but mutations tax would apply if such an unregistered transfer were to be registered in the future;

− If henceforth mutations tax is paid on an off-title transfer, the transferee will not be required to pay the mutations tax again if the off-title transfer is later registered;

− How does the partnership concept enter into the equation? What seems relevant for a group of co-owners or partners is the difference at civil law (i.e., at private law) between a co-ownership and a partnership. At civil law, a co-owner has a direct undivided interest in the immovable. Registered changes regarding a co-owner have been and continue to be subject to mutations tax. Henceforth, the same appears to be the case for off-title transfers of a co-ownership interest.

− Compare to a partnership interest. In Quebec (although seemingly not in Ontario for example), recent case law characterizes a partnership (a limited or general partnership, it seems), at civil law, as having a separate patrimony (akin to being a separate entity, similar to a trust), distinct from that of its partners, such that partners do not have any ownership rights in the partnership property, and a transfer of a partnership interest is not a transfer of the underlying property owned by the partnership. (Examples of this recent Quebec case law are the 2010 Quebec Court of Appeal decision of Ferme C.G.R. and the 2015 Quebec Court of Appeal decision of Ville de Terrebonne.) It therefore appears, based on this recent case law, that regardless of whether a partnership’s interest in an immovable is on or off-title, a transfer of an interest in the partnership is, firstly, not something that should be registered on-title, and an off-title transfer of a partnership interest should not be a transfer that is subject to mutations tax. This could be a powerful advantage for investors moving in and out of the partnership;

− As a caveat with regard to a group of investors in a partnership, note that whenever there is only one partner left in the partnership (unlikely to happen, by definition, in limited partnerships), the Civil Code of Quebec has always indicated that the partnership will be deemed as dissolved unless another partner is added within 120 days. Also, note that when deciding between a partnership or co-ownership, take steps to avoid negative income tax consequences [for example: from a tax standpoint, a partnership is a transparent vehicle that allows its income (and losses) to flow through to its partners, however a limited partner will be restricted in deducting losses from a limited partnership to its at-risk amount; since capital cost allowance (CCA) and reserves are taken at the partnership level, the partners cannot independently decide to take CCA, reserves or other discretionary deductions to suit their own purposes; a Canadian partner cannot avoid Canadian tax on recaptured depreciation by the sale of a partnership interest (instead of the underlying property) to a tax-exempt person or a non-resident].

− Also not to be forgotten, regarding a possible downside for partnerships, is that when the partnership itself is the transferee or transferor of the property, mutations tax exemptions appear to be never available.

− Briefly, as regards the Quebec budget having narrowed some of the exemptions to the payment of mutations tax, this mostly relates to the exemptions where at least one of the transferees or transferors is a corporation, the non-corporate party if any, is an individual, and in essence for a simple scenario, one of the parties holds 90% of the voting shares of the other. Henceforth, the 90% threshold will be determined by calculating the number of votes attached to the shares, rather than using other methods such as fair market value. The 90% exemption condition must then be maintained for 24 months following the transfer, and for 24 months before the transfer where a corporation has transferred to an individual (or from the time of incorporation if such a transferor corporation has existed for less than 24 months). The granting of an option to purchase shares during a relevant 24-month period is deemed to be a transfer of shares, unless the option is contingent upon death, disability or bankruptcy (i.e., unless the option is a standard shareholders agreement clause, essentially).

The above is a brief summary, but feel free to contact me at any time to discuss in relation to your transactions.

Daniel Frajman, TEP (incoming Chair of STEP-Montreal), is a partner at Spiegel Sohmer, a Montreal law firm. Daniel negotiates and drafts contracts for business and real estate sales and purchase transactions, leases, debt and equity financings, shareholders agreements, trusts, wills, and for non-taxable non-profit and charitable businesses.