Since the introduction of the transfer duties tax, otherwise known as the “welcome tax”, various exemptions existed for transfers of real estate between 90% closely related persons or entities. 90% closely related means that one party has a 90% or more interest in the other party. However, for some unknown reason, partnerships, general or limited partnerships, were excluded from this exemption. Finally, the government has recently filed Bill 13 which, inter alia, will implement the 2017 promise of “welcoming” partnerships by extending this 90% rule.
Real estate developments with more than one party, especially if they have different tax status, are commonly structured as partnerships, including those with real estate investment trusts (REIT). Prior to this exemption, a reorganization of a partnership incurred the “welcome tax”, which was perceived as a cost of doing business. The exemptions for partnership transfers are common in other provinces and countries, so the changes in Quebec are really a catch up to align itself with the other jurisdictions in accepting this real estate structure.
The proposed amendments will allow an exemption from the tax in the following circumstances:
- Roll in transfer: The transfer from an individual to a partnership, which immediately after the transfer, the individual’s share of the partnership’s income or loss is at least 90%.
- Roll out transfer: The transfer from a partnership to an individual whom was immediately before the transfer a partner and had a share of the partnership’s income or loss of at least 90%.
- Closely held transfer: The transfer between 2 partnerships which are closely related being owned directly or indirectly by a person or entity whose share in the partnership’s income or loss is at least 90%. The bill deems partnerships to be the equivalent of corporations, so this closely held exemption, should apply if one party is a corporation and the other a partnership.
In the scenarios above, the 90% share of income or loss must be met during the 24-month period following the date of transfer and in the roll out scenario for 24 months before the transfer. For partnerships that existed less than 24 months, the exemption will be granted at the time of the transfer if the condition is fulfilled for the entire period between the date the partnership is created to the date of the transfer.
If Bill 13 is adopted, this exemption will apply to transfers of real estate to or owned by partnerships, retroactive to December 20, 2017.
The disclosure procedure introduced in the 2016-2017 Quebec budget to look through transfers will apply to partnerships. Therefore, if the exemption condition relating to the percentage of income or loss is not met during the 24-month period then the transferee of the property will be required to disclose this fact.