Increased transfer taxes on real estate in the City of Montreal have the potential to add thousands to the sale of properties in the city, say commercial real estate lawyers.
The additional transfer duty paid by the purchaser at the point of transfer of the property is half of a percentage point, bringing the total municipal transfer duty to two per cent for properties valued at $500,000 or more. The hike in taxes may make it more attractive for property owners to look into special vehicles to avoid the duty and make properties more attractive to prospective buyers.
“With the new transfer duties, with the hikes we have experienced the threshold to determine is it worth putting in place such a structure will become more easily reached,” says Stikeman Elliott LLP Montreal associate Sébastien Thomas.
“The cost of transferring real estate properties will be higher because of those transfer duties, now we will more easily reach the conclusion that, in that specific case, it is relevant to put in place a structured holding company to be able to benefit from those exemptions in the law.”
There are four main exemptions from the tax set out under the Act Respecting Duties on Transfers of Immovables regarding real estate in Montreal:
• transfer to an ascendant or descendant;
• transfer between spouses;
• where the buyer is a public organization by law; and
• where the transferor is a natural person and the transferee is a legal person with 90 per cent of its issued shares with full voting rights are owned by the transferor.
Thomas says the fourth exemption is a tool whereby companies can create a holding company — or special purpose vehicle — that a specific piece of property can be transferred into. Transfers of properties within the same company are not subject to the duties.
Shares of the holding company, rather than the asset itself, can be sold to a purchaser to avoid the duties. There is one caveat, the property must be held in the holding company for at least two years before the shares can be sold to avoid the transfer tax.
For this reason companies that anticipate selling properties in the future may now want to consider moving them into special purpose vehicles.
“For many reasons, having a special purpose vehicle is always a wise thing to have,” says Jenny Ross, a Montreal real estate lawyer with Fraser Milner Casgrain LLP.
She cautions companies to remember the two-year rule. If a company attempts to avoid paying the transfer duties twice within a 24-month period it may be subject to the anti-avoidance rule under the Income Tax Act. As such, the property’s transfer becomes subject to 200-per-cent duty, and both the vendor and purchaser would be liable to make sure the penalty is paid.
Prior to the increase, the maximum transfer tax was 1.5 per cent for properties exceeding $250,000.
The new rules mean properties valued between $250,000 and $500,000 would be subject to a 1.5-per-cent tax and properties worth more than $500,000 would incur the greater two-per-cent duty.