Have you ever been expropriated by a municipality? Or, as a municipality, have you acquired a property by expropriation for public utility purposes?
If so, you should be aware that compensation paid in this context raises important tax issues in terms of consumption taxes. These rules are complex, whether the compensation is the result of an amicable agreement or a decision rendered by the Tribunal administratif du Québec (“TAQ”), the only court competent to set the amount of compensation payable in the event of expropriation.
We are aware that when an expropriation notice is received, your energies are focused on understanding your rights and obligations, and that the analysis of tax impacts is often put aside or even forgotten.
The purpose of this publication is to make you aware of the main points to keep in mind when dealing with expropriation, in particular the rules set out in the Excise Tax Act (“ETA”) and the Act respecting the Québec sales tax (” AQST “).
Understanding your rights and obligations during expropriation
In Quebec, expropriations are governed by the Civil Code of Quebec and the Expropriation Act. With regard to sales taxes, the LTA and LTVQ consider that the acquisition of property by expropriation constitutes a “supply of property”, for which it is necessary to determine the tax qualification of the expropriated property.
In principle, any supply of goods is subject to tax, unless it is covered by a specific exemption measure. Taxability will depend on the nature of the expropriated property. For example, since commercial real estate is generally subject to taxes, the GST/HST and QST tax characterization will follow the same characterization in the case of expropriation, with a few subtleties discussed below. However, particular attention should be paid to residential properties that may be exempt, or partially taxable in the case of mixed-use properties (commercial and residential). Each situation is unique and requires a specific analysis of the building’s actual use at the time of expropriation.
The compensation payable under the Expropriation Act generally comprises two main components: the value of the expropriated property, generally corresponding to a given sum, and an amount for damages or prejudice suffered as a result of the expropriation. For example, the damages or prejudice suffered may consist of costs and disbursements relating to disturbances and inconveniences, or the loss of an economic advantage. It is important to note that each component must be analyzed separately to determine whether or not it is taxable. In addition, there may be interest paid on compensation, which is considered to be consideration for a GST/HST- and QST-exempt supply of a financial service.
When the parties cannot agree on the amount of compensation, a provisional indemnity may be paid pending the TAQ’s final decision. If this indemnity exceeds the final indemnity established by the court, an adjustment of taxes may be necessary, resulting in repayment obligations on the part of the expropriated party. In other situations, expropriation may not involve the transfer of ownership of an immovable, but rather a partial restriction on its use (e.g. servitudes, loss of access). In such cases, the compensation may not be taxable, and an analysis will have to be carried out by a tax specialist.
Rules for collecting and remitting taxes
Responsibility for collecting and remitting applicable taxes will depend on the status of each party to a transaction, i.e. whether or not they are registered for GST/HST and QST. The LTA and LTVQ set out rules governing when taxes are payable in respect of a supply of immovable property. These rules must be taken into account.
When a municipality is registered for GST/HST and QST, acquires a property by expropriation and the taxes are applicable, it is the municipality that will be required to remit the taxes payable by self-declaration.
However, if the municipality is not registered, the applicable taxes must be billed separately by the expropriated party. If the municipality fails to collect GST and QST, the expropriated party is liable to the tax authorities. Failure to do so could result in the imposition of penalties and interest by the tax authorities, even several years after the transaction.
Practical tips
When you become a party to an expropriation, remember to clearly itemize the components attributable to the value of the property and the compensation to facilitate qualification (taxable or non-taxable). In addition, we strongly encourage you to consult a professional expert in commodity taxes before finalizing such a transaction, to avoid any unpleasant surprises in the event of a tax audit.
An article from our Consumption Taxes team
