Demystifying Real Estate Transfer Taxes

All municipalities in Québec collect a tax, termed “transfer duties”, whenever the right of ownership in a real estate property is transferred, subject to certain exemptions and exclusions. It is important to understand what this tax consists of, in order to fully appreciate its impacts and plan any real estate transfer.

Context

The real estate transfer tax is often referred to as a “Welcome Tax”. However, that term does not actually denote a municipality’s apparently odd way of “welcoming” new arrivals, but is derived from the name of the provincial Minister of Municipal Affairs, Jean Bienvenue, who authorized its institution. “Bienvenue”, of course, means “Welcome” in French.

The collection of real estate transfer duties by municipalities has been mandatory since 1992 (between 1976 and 1992 it was optional) and is governed by two provincial statutes, the Act respecting duties on transfers of immovables (R.S.Q., c. D 15.1) (the “Act”) and the Act respecting municipal taxation (R.S.Q., c. F-2.1).

Real estate transfer duties are a direct property tax that applies to the transfer of any real property and must be collected by the municipality where the property is located.

The tax must be paid by the new owner of the property and is due as of the 31st day following the sending of the tax account by the municipality. This account is usually sent by the municipality between the third and sixth month after the notarized deed of transfer is signed and registered.

Calculating the transfer duties

The Act provides that the tax base for the transfer duties is the greater of the following amounts:

  1. the amount of the consideration exchanged for the transfer of the property (the price paid);
  2. the amount of the consideration stipulated for the transfer of the property (the price specified in the transfer deed, in the event that it is different than the price actually paid);
  3. the amount of the property’s market value at the time of the transfer (the standardized value entered on the municipal assessment roll).

The amount of the transfer duties payable by the new owner will therefore be calculated in accordance with the foregoing tax base and by applying the following rates: 

  1. Tranche of the tax base less than or equal to $50,000: 0.5%
  2. Tranche of the tax base greater than $50,000 but no greater than $250,000: 1%
  3. Tranche of the tax base in excess of $250,000: 1.5%

Take the example of an apartment building acquired for $540,000:

 

Tranche between 0 ≥ $50,000

0.5%

 

$250

 
 

Tranche between $50,000 ≥ $250,000

1.0%

 

$2,000

 
 

Tranche between $250,000 ≥ $540,000

1.5%

 

$4,350

 
 

Total transfer duties payable: 

 

 

$6,000

 

Special case of Montréal

For transfers in Montréal, a new regulation effective January 2010 provides for a 2% surtax on any transfer amount in excess of $500,000.

Thus, for the Montreal area, again using the above example, the transfer duties would be calculated as follows:

 

Tranche between 0 ≥ $50,000

0.5%

 

$250

 
 

Tranche between $50,000 ≥ $250,000

1.0%

 

$2,000

 
 

Tranche between $250,000 ≥ $500,000

1.5%

 

$3,750

 
 

Tranche between $500,000 ≥ $540,000

2.0%

 

$800

 
 

Total transfer duties payable: 

 

 

$6,800

 

As transfer duties are calculated according to the value of the real estate property, it is important to identify what exactly is being transferred.

Object of the transfer

If you acquire a vacant lot and subsequently build on it, the object of the transfer will be the lot alone, and the transfer duties will consequently apply only to it and not on the building.

Similarly, if a house is built on a lot you already own, no transfer duties will be payable on the house, as the duties will have already been paid on the lot at the time it was acquired.

However, if you acquire both a lot and a new house to be built by a contractor (which are often delivered as a package) the object of the transfer will then be the entire package, and transfer duties will be payable on both the lot and the new house.

Exemptions and exclusions1

Some real estate transfers are specifically exempted or excluded from the application of transfer duties, including:

  • transfers of properties forming part of registered agricultural operations;
  • transfers to public bodies;
  • transfers where the tax base is less than $5,000;
  • transfers to a relative (other than a brother or sister) who is a direct ascendant or descendant of the transferor, or between spouses, or to a transferee who is the spouse of the son, daughter, father or mother of the transferor or is the son, daughter, father or mother of the spouse of the transferor;
  • transfers by a shareholder to a corporation at least 90% owned by the shareholder, or by such a corporation to the shareholder.

Note that even if no transfer duties are payable by virtue of an exemption or exclusion, the municipality may still impose a special duty of $2002.

In addition, section 19.1 of the Act provides that the payment of a special duty (equal to 125% of the transfer duties that would have been payable, absent an exemption) may be imposed on the transferee of a property if the transfer was done in contemplation of the acquisition of control of a corporation by the transferee, and the conditions of section 1129.29 of the Taxation Act (R.S.Q., c. I-13) are satisfied. You must consequently be especially careful in such situation.

Conclusion

Given the potential major impact of real estate transfer duties on your finances, you should be aware of and provide for them. A simple fiscal planification of the real estate transfer could make you save a decent amount of money.


1 Sections 17 and following of the Act.
2 Sections 20.1 and following of the Act.

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