Buying and Selling Real Estate in Canada

Unlike the other Canadian provinces and territories, which are all common law jurisdictions, Québec is a civil law jurisdiction. It is governed by the Civil Code of Québec, originally inspired by the French Napoleonic Code, and therefore quite distinct from other Canadian legal systems. In Québec, real estate is categorized as being immovable (real) property, as opposed to movable (personal) property. Both lawyers and notaries handle Québec real estate transactions, but only notaries may receive deeds creating encumbrances (hypothecs, known as liens or mortgages in other jurisdictions). Québec notaries are not analogous to notaries public in other jurisdictions; they receive the same legal training as lawyers but are members of the Chamber of Notaries and graduate from its distinct post-university program, specializing in real estate matters.

Purchase and Sale Agreement

In both residential and commercial sales, the purchase and sale agreement takes the form of a deed of sale, signed by both parties, which sets out all the terms and conditions of the transaction, including the date of occupancy, the warranties provided by the seller (e.g., title, condition of the property, seller’s matrimonial regime in the case of individuals, seller’s tax residency), the purchase price and payment terms, as well as the 5% federal goods and services tax (“GST”), 9.975% Québec sales tax (“QST”) and mutation taxes due on the transaction. The deed must be signed before a Québec notary if there is a balance of price or if the buyer is assuming an existing encumbrance; otherwise, it may be signed either in notarial form (which is the general practice) or under private signature before two witnesses, who must also sign.

Forms of Ownership Possible

Residential property is commonly held in an individual’s personal name (or both spouses’ names in the case of a couple) but may also be held in a family trust or by a holding corporation. A family trust is created by signature of a notarial trust deed naming 3 trustees, at least 1 of whom must be independent (i.e., neither the settlor nor a beneficiary), which identifies the beneficiaries and defines the trustees’ powers.

Commercial property may be held in a variety of ways, including directly in the name of the owner, or through a corporation, partnership, limited partnership, unlimited liability company or trust. It may also be held in emphyteusis for up to 99 years, in which case the beneficial and legal (or “bare”) ownership, which would otherwise be united in a single owner, are divided among one or more individuals or entities.

Closing Costs / Adjustments

Mutation (“welcome”) tax

The buyer must pay the mutation or transfer tax (colloquially referred to as the “welcome tax”) to the Québec Minister of Revenue under the Mutation Tax Act (Québec) within 31 days of issuance of the first tax bill, subject to certain exceptions for transfers between related parties (e.g., two spouses, a parent and child, or a corporation and its shareholder, provided the shareholder holds at least 90% of

the shares and the buyer does not re-sell or “flip” the property within 24 months of the initial exempt sale).

Mutation tax rates are calculated on the higher of the purchase price and municipal evaluation of the property (both of which are identified in the deed, as is the amount payable, even where an exemption applies). The 2021 rates are as follows: (i) 0.5% of the first portion of the taxable amount up to $51,700; plus (ii) 1% of the portion of the taxable amount between $51,700.01 and $258,600; plus (iii) 1.5% of the portion of the purchase price in excess of $258,600.01. Québec municipalities are entitled to impose a surcharge of up to 3% for properties having a purchase price or municipal evaluation over $500,000. This is the case in many cities including Montreal, its suburbs, and surrounding areas. For example, Montreal charges (i) 1.5% on the portion of the purchase price between $258,600 and $517,100, (ii) 2.0% on the portion of the purchase price between $517,100 and $1,034,200, (iii) 2.5% on the portion of the purchase price between $1,034,200 and $2,000,000 and (iv) 3% on the portion in excess of $2,000,000.

Even where an exemption applies, the city has the right to charge a supplemental tax as follows: none if the taxable value is less than $5000, 0.5% of the taxable value between

$5000 and $40,000, plus a fixed amount of $200 if the taxable value exceeds $40,000.

Non-resident vacant or underused property tax

The 2021 federal budget announced the government’s intention to implement an annual national 1% tax on the value of Canadian property owned by non-Canadian residents which is considered to be vacant or underused, effective January 1, 2022. The tax will require all owners, other than Canadian citizens or permanent residents of Canada, to file a declaration as to the current use of the property, with significant penalties for failure to file.

Adjustments

The buyer and seller adjust for taxes, utilities, and other prepaid expenses as at the date of transfer of ownership. In addition, in the case of commercial property, adjustments are also made for rents, third party operating expenses and common area maintenance expenses.

Typically, the offer and deed will provide that the buyer chooses the notary and pays the notarial fees, including the cost of publication and the provision of notarial copies to both parties. If the purchase is financed, the lender will choose the notary to receive the deed of hypothec (mortgage), who will ideally also handle the sale, and the buyer will assume those costs. If there are existing encumbrances on the property (e.g., the balance of a hypothecary loan) to be paid out at closing, the notary will obtain a payout letter from the lender, arrange for payment from the sale proceeds and have the prior lender’s security radiated, all at the seller’s expense.

Sales Tax

The sale of a new residential property, or of an existing property that has undergone major renovations, from the builder / developer is subject to the GST and QST, with a partial rebate available for individuals only. If the purchase price is between $350,000 and $450,000, then up to

36% of the amount of GST not exceeding $6300 is refundable. If the purchase price is between $200,000 and $300,000, then 50% of the amount of QST not exceeding $19,950 is refundable.

The sale of an existing residential property which is occupied by its owner and not rented property is not subject to GST or QST; however, if the owner of the property resides in part of it and rents part (e.g., a duplex or triplex), the portion not used by the owner as a residence, determined on a pro- rated basis, will be taxed in the same manner as the sale of a commercial property.

The sale of a commercial property is subject to both GST and QST, unless both parties declare in the deed that they are registered for both taxes, provide their respective tax numbers and file an election to have the transaction be treated as non-taxable.

It is the buyer’s obligation to collect and remit the GST and QST, so the seller’s tax numbers should be verified; if they are invalid, the buyer will be liable to pay these amounts to the tax authorities.

If the seller is not a Canadian resident, the buyer must withhold 25% of the gross proceeds in trust (typically with the officiating notary) until the Canada Revenue Agency confirms the amount to be paid and issues a certificate of compliance (“tax clearance certificate”) when the tax has been fully paid, at which time any excess funds may be released to the seller. A buyer who fails to withhold and remit the required tax could be held liable for the entire amount, plus penalties and interest.

Annual Costs For Property Ownership

In addition to the purchase price, a buyer must typically budget for the following annual expenses of property ownership:

A. Property Insurance (including boiler and machinery, fire, damage and liability).

B. Property Taxes (municipal, school, water, special assessments); if all or part of the property is rented out, the rental income will be subject to income tax in the hands of the landlord.

C. Operating expenses

You can contact us directly for your legal needs and any questions regarding tax laws for ownership.