Transfer duties on rights of emphyteusis: the Court of Appeal confirms the unfair wording of the law

The Quebec Court of Appeal recently concluded in 9267-0801 Québec inc. v Ville de Montréal that, in the context of the transfer by the “emphyteuta” (the term used in the Civil Code of Quebec for the beneficiary of the right of the emphyteusis) of its rights of emphyteusis, the purchaser of such rights is required to pay transfer duties on the basis of the municipal evaluation of the property and not on the actual consideration paid (if less than the municipal evaluation). This decision was reached notwithstanding the fact the municipal evaluation does not take into account the limitations on the right of ownership under an emphyteusis as opposed to full ownership.

Transfer duties based on consideration paid vs. market value

The purchaser of the emphyteutic rights in this case tried to argue that the emphyteusis was not the object of a separate unit of assessment by the city and, accordingly, the city could not use the municipal assessment of the property as a basis for calculating the transfer duties. The purchaser made reference in its argumentation to the landmark Quebec Court of Appeal decision in 4053532 Canada Inc. v the City of Longueuil rendered in April of 2013 (the Longueuil Decision).

The Longueuil Decision opened the door to an innovative way of interpreting An Act respecting duties on transfers of immovables (the Act) due to the fact that, in such case, the court concluded that the calculation of transfer duties in the sale of the land over which there was a right of emphyteusis (as opposed to the sale of the emphyteuta’s rights of emphyteusis) should not be calculated on the basis of the municipal evaluation, but rather on the land’s market value (more specifically, the actual consideration) since the land rights did not form part of the unit of assessment established by the city.

No leeway in interpretation

These arguments were rejected by the trial judge and the Court of Appeal as the Court of Appeal concluded that the relevant sections of the Act were unequivocal, but it did acknowledge the trial judge’s comments to the effect that the application of such legislation could lead to unfair tax assessments.

Practitioners now have the difficult task of explaining to clients who purchase emphyteutic rights (when there is relatively little time left in the term of the emphyteusis) that the purchaser must nonetheless pay transfer duties based on the municipal evaluation that in no way takes into account the diminishing return on the property since the right of ownership under an emphyteusis has a finite term. The court leaves it in the legislature’s hands to make the appropriate amendments to the Act, while concluding that the Act’s current wording is clear and leaves no room for alternative interpretation.