Are municipalities entitled to levy property taxes on data centre equipment?
This article appeared in French in the March 2023 issue of the Journal des Parcs industriels published by the Corporation des parcs industriels du Québec.
Quebec has proven a highly attractive location for data centres,1 but a recent Quebec Court of Appeal decision adds a caveat: certain equipment and infrastructure can be deemed to increase an immovable property’s value and, consequently, its tax assessment. The Court’s ruling and the reasoning behind it have far-reaching repercussions for other sectors.
A recent Court of Appeal decision2 entitles the City of Montreal to levy property tax on certain computer data centre equipment. The respondent, Locoshop Angus, which leases part of its building to Ubisoft, had been attempting since 2012 to prevent the City from taxing its tenant’s equipment. However, now that the application for leave to appeal to the Supreme Court3 has been dismissed, the Quebec Court of Appeal’s decision is final: municipalities are entitled to levy property tax on certain information technology equipment.
The Court of Appeal was called on to interpret the concept of “movable property… permanently attached to an immovable” in section 1 of the Municipal Taxation Act4 (the “Act”). A test created in Laurentian5 was used to determine whether movable property can be considered “permanently attached.” If the answer is yes, such a movable is deemed technically part of the immovable, and the City is entitled under the Act to collect property tax on it.
The Court first clarified that, to be considered permanently attached, movables such as equipment for hosting computer servers do not need to be literally attached to the ground. The movable in question must merely be immobilized, meaning that it cannot be removed without being dismantled or without breaking down the building component in which it is placed. The absence of a physical attachment is not determinative.
Movable property may also be considered “permanently attached” if an intellectual connection binds it to the immovable in which it is located. This intellectual connection exists when an immovable becomes incomplete in the absence of the said immovable. For example, in the premises leased to Ubisoft, a raised floor and suspended ceiling have been installed. Without the computer server equipment, these building components would be incomplete.
The Court of Appeal found that the Court of Quebec (which hears appeals from the Tribunal administratif du Québec (TAQ), Real Estate Section) erred in focusing its analysis on the notion of a building’s specific vocation. The TAQ’s conclusion that the space leased by Ubisoft would not be incomplete without the computer data centre equipment is based on the mixed-use nature of the building. For the Court of Appeal, this reasoning is untenable because it would prevent any movable from ever being deemed “permanently attached” to a general-purpose immovable. The specific vocation of a building is not an essential condition for a movable to be considered permanently attached. In this case, the equipment was installed to remain present until such a time as the premises change vocation. In other words, it is not a requirement for the building to have been built exclusively for Ubisoft.
This ruling has ramifications beyond computer data centres. In a subsequent decision,6 the Court of Appeal ruled in favour of the City of Quebec, finding that Vidéotron’s telecommunications equipment, i.e., the base stations that are part of their wireless telephony network, could be added to the property roll under the Act.
Clearly, this property tax development will substantially increase costs for some Quebec businesses. Since the tax assessment is based on the value of immovable property, and the technological equipment involved is of great value, property values could increase exponentially. To take computer data centre equipment as an example, the cost of generators, air conditioning systems and computer system back-up batteries, among other items, could be added to the property tax roll. Fortunately for many businesses, the Act excludes equipment used for industrial production.
This decision has serious ramifications for both building owners and businesses leasing space. Naturally, municipalities stand to benefit, as for many property taxes are the primary source of revenue to fund municipal operations.7 One thing is clear: when drafting leases, it is important that both landlord and tenant understand this potential tax and plan each parties’ roles and responsibilities accordingly.
The authors wish to thank articling student Camille Godin for her contribution to this article.
1 La Presse, October 27, 2021. Le Québec, nouvel eldorado des centres de données | La Presse.
2 Ville de Montréal v. Société en commandite Locoshop Angus, 2021 QCCA 1217.
3 Société en commandite Locoshop Angus, et al. v. Ville de Montréal, et al., 2022 CanLII 42895 (CSC).
4 Municipal Taxation Act, chapter F-2.1.
5 Québec (Ville) v. Corporation d’assurance de personne la Laurentienne, 1995 CanLII 5307 (QC CA).
6 Ville de Québec v. Vidéotron ltée, 2022 QCCA 594 (CanLII), 2022 QCCA 594.
7 City of Montreal, How municipal taxes are calculated.