Data Center: Characterization of Equipment Under the Municipal Taxation Act – Proceed with Caution
On October 9, 2013, the Administrative Tribunal of Québec (Immovable Property Section) (the “Tribunal”) rendered a decision concerning the inclusion on the property assessment role of the City of Montreal (the “City”) of certain equipment used in the operation of a data center, specifically the computer servers housed in the building where the center operates.
The facts of the case are the following. iWEB Group Inc. (“iWEB”) leases a building owned by Société immobilière IMSO Inc. (“IMSO”) in which iWEB operates a data center housing its own servers. The building is a light industrial building formerly used to manufacture bolts. In order to make it suitable for its business activities, iWEB significantly altered the building’s layout and installed specialized equipment.
The dispute with the City involves the inclusion of certain items of iWEB’s equipment on its immovable property assessment role, based on the principle of the intellectual attachment of movable property to an immovable. If that basis rightly applies, then the equipment must be treated as immovable property for the purposes of the Act respecting municipal taxation1 (the “Act”). In that case, the value of the equipment is to be included on the role, which would in fact considerably increase the amount of property taxes payable in respect of the building.
At first instance, the Tribunal agreed with the City2 arguments, according to which the equipment in question had an intellectual attachment to the immovable. IMSO and iWEB appealed the Tribunal’s decision before the Court of Québec (Administrative and Appeal Division), which, on February 19, 2016, overturned the Tribunal’s decision3. The City then applied to the Superior Court for judicial review of the Court of Québec’s decision. On February 2, 2018, the Superior Court dismissed the City’s appeal4 and upheld the judgment of the Court of Québec.
The main issue of this case concerns the concept of permanent attachment to an immovable of certain specialized equipment housed in the building, namely an air-conditioning system, a generator and other electrical equipment. This specialized equipment is necessary for the operation of iWEB’s business and ensures the continuous functioning of the computer servers in the building, 24 hours per day and seven days a week, even if the electricity supply from Hydro-Québec is interrupted.
The intended purpose of the building (general, specific or unique) also plays a determinative role in the analysis of the nature of the attachment of equipment to it. In practice, the more an immovable has a specialized purpose, the greater the likelihood that the specialized property it contains will be deemed to be permanently attached to it.
The Tribunal’s decision
In interpreting the definition of “immovable” in section 1 of the Act, the Tribunal concluded that despite the fact that the equipment in question was not physically attached to the immovable, it was nonetheless intellectually immobilized to the building, thereby acquiring a fixed foundation. The Tribunal concluded that the immovable had acquired a “specific purpose”, i.e. the housing of computer servers, by virtue of the specialized nature of iWEB’s equipment and the substantial changes made by IMSO and iWEB to the building’s layout in order to make it suitable for housing that computer equipment. In other words, the Tribunal considered that the specialized nature of the equipment and the layout changes influenced in a major way the building’s purpose, enough to modify its own nature. Therefore, such equipment would be subject to taxation as part of the building.
The Court of Québec’s decision
The Court of Québec disagreed with this conclusion, taking the position that the immovable was rather a general-purpose building. The Court specified that an immovable for a specific purpose is one designed to accommodate a precise usage, which is characterized by its specific architectural design and structural components. Moreover, such an immovable cannot be used for other purposes unless substantial modifications are made which would be difficult to justify economically.
In this instance, the building was formerly used as a bolt manufacturing factory, and the Court was of the view that it was erroneous to conclude that the addition of specialized equipment transformed it into a building for a single specific purpose. The Court pointed out that a building’s specific characteristics determine its purpose, not the objects that are placed in it. The attachment must be between the immovable and the movables incorporated into it, and not between the movables inter se.
The Superior Court’s decision
The Superior Court was of the same view as the Court of Québec, and cited the following dictum from the Quebec Court of Appeal in its decision in the matter of La Laurentienne: “the concept of permanent attachment must be analysed in terms of the essentialness of the object for the immovable or a component thereof, and not for the business enterprise.”5 In other words, in order to be considered permanently attached, a specialized object must be essential for the specific purpose of the immovable, assuming it has one. The nature of the business enterprise being carried on in the building is not to be taken into consideration in the analysis.
In iWEB’s case, it is important to distinguish the situation where objects are useful for the business enterprise being carried on in the building from that where the objects are useful for the building itself. To that end, one must consider the extent to which an object is indispensable for the building, i.e. whether or not the building would still be able to be used if the object in question were removed from the building.
What to take away from these decisions
Essentially, according to both the Court of Québec and the Superior Court, the Tribunal erred by basing its reasoning on the specificity of iWEB’s property and the specialized nature of its business, rather than on the specific characteristics of the building housing that property. Each of the courts stressed the importance of a case-by-case study of the nature of the attachment of movable property to the immovable.
We will have to wait until the province’s highest court rules on this matter before drawing broader conclusions, as the City has applied for leave to appeal the judgment of the Superior Court.
That being said, both real estate promoters and building owners must remain attentive to how the definition of the term “immovable” in the Act respecting municipal taxation is applied. This definition gives rise to important questions for stakeholders in the real estate sector, both at the design stage of a new project, as well as during renovations and when a commercial lease is concluded. A case-specific study must be undertaken in order to assess the repercussions of such a project on the value of an immovable entered on the assessment role.
1 CQLR, c. F-2.1
2 2013 QCTAQ 1070
3 2016 QCCQ 1120
4 2018 QCCS 311
5 1995 CanLII 5307 (QC CA)