Oct 28, 2013
Land Transfer Tax on an Asset Sale – “Fixtures” v. “Chattels”
By: Darrell Gold
In a 2013 B.C. decision, (Zellstoff Celgar Ltd. v. British Columbia), at issue was whether or not equipment and machinery included in the purchase of a saw mill with 11 parcels of land were fixtures not chattels. If the equipment and machinery were “fixtures”, the result would be a huge increase in land transfer tax payable under the Property Transfer Tax Act of B.C. (“PTTA”) (akin to but not the same as the Land Transfer Tax Act, Ontario) rather than if they were personal property i.e. chattels.
In 2005 the buyer bought a saw mill for $252,000,000.00, including lands, buildings and several thousand pieces of equipment, virtually all of which was affixed to concrete or steel or to other pieces of equipment with bolts. Most of it could only be removed at considerable time and expense. The asset purchase agreement referred to the equipment as “personal property” not fixtures. The buyer paid property transfer tax under the PTTA of about $286,000.00 based on a “land value allocation” in the agreement of about $15,000,000.00. However, the administrator under the PTTA assessed the buyer for $4,782,382 in total tax (over a 1650% increase!), characterizing the machinery as “fixtures” and including it in the fair market value of the land. The buyer appealed to the B.C. Minister of Small Business and Revenue.
The PTTA imposes property transfer tax on the “fair market value” (“FMV”) of a “taxable transaction” at the rate of 1% on the first $200,000 and 2% thereafter. A “taxable transaction” is defined in s. 1 as a transfer of an estate in fee simple in land; “fair market value” is defined as “the amount that would have been paid for the fee simple interest in the land had it been sold at the date of registration … in the open market by a willing seller to a willing purchaser” and free of encumbrances. The PTTA does not define “land” but at common law, land includes fixtures.
The machinery was “fixtures” at common law and was properly taken into account in determining the FMV of the “land” for assessment. The appeal was dismissed by the Minister other than a small reduction in tax, so the buyer’s property transfer tax liability turned out to be about $4,500,000.00 – an increase of over 1650%!
They were found to be fixtures since: The removal and relocation of many of the very large pieces would be very expensive and time consuming and that magnitude of removal was uncommon; Each piece of machinery was an interconnected component of the manufacturing process and was affixed to land in a substantial way with the object of the better use of the land for purpose for a saw mill; While parties may by contract assign rights to chattels or fixtures, such rights are contractual only and do not affect the legal question of whether a chattel, once affixed, becomes a fixture and as such a part of the land; The characterization of machinery as “personal property” in the asset purchase agreement had no bearing on the issue; The machinery, while affixed, performed no function apart from its role in pulp manufacturing process and engineering evidence established that no piece of machinery, while affixed, performed a function apart from its role in pulp manufacturing process and that each piece operated in conjunction with whole operation; The machinery as a whole was affixed to facilitate the proper operation of pulp manufacturing process. Some of the machinery was affixed since the mill was built in 1960s.
- In Ontario, under the Land Transfer Tax Act, tax (“LTT”) is triggered on tendering a conveyance of “land” for registration based on the “value of the consideration”, and land is defined to include “fixtures”.
- There is a right to appeal an assessment under the Act.
- If it looks and quacks like a duck, it’s a duck no matter what you call it. So, whether your agreement calls assets chattels rather than fixtures, if they meet the test for fixtures then that it what they are for tax purposes.
- The length of time an item has been “annexed” can be relevant and the longer it’s annexed can indicate an intention that it is a “permanent annexation” making it a fixture and its value then subject to LTT.
- The sale of land, fixtures and chattels in Ontario can trigger 13% HST as well as LTT but if items are truly chattels then only HST.
- Since February 1, 2008 in Toronto, in addition to LTT there is also Municipal Land Transfer Tax on the consideration paid on the sale of commercial property as follows: 0.5% up to $55,000.00, 1% up to $400,000.00 1.5% up to $40,000,000.00 and 1.0% over that amount, so that increases the tax if the items are fixtures.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
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As published in Property Biz Canada October 27, 2013.