This second Part of this article provides an overview of the topics and concepts that have been identified as irritants to the tax community in respect of the application of federal tax legislation in Quebec. It also presents problems arising from the implementation of the harmonization program in the area of fiscal legislation which require in-depth analysis.

2.1 Propriété effective/beneficial ownership

Federal tax legislation frequently uses the concepts of "beneficial ownership"/propriété effective. These concepts that originate from the common law have no equivalent in civil law, which makes problematic the application in Quebec of provisions where they are used, as is apparent in numerous doctrinal critiques on this issue.[42] These concepts occur in a variety of contexts, including that of the transfer of property to a trust, guarantees, concepts of disposition and acquisition, international fiscal agreements, rules limiting the choice of jurisdictions, etc.

While there is a presumption that equates certain legal institutions of the civil law to beneficial ownership in paragraph 248(3)(f) of the I.T.A., such expressions remain vague for Quebec civil law experts.

2.1.1 Trusts

The comments of Me Maurice Regnier on the Legislative proposals relating to trusts, which were taken up in Bill C-43, reveal frustration within the tax community in Quebec with regard to the legislative fiscal provisions dealing with trusts:

Comme telles ces mêmes propositions sur les fiducies sont une initiative heureuse pour les provinces anglaises, car elles suppriment plusieurs ambiguïtés découlant de l‘apport de biens à une fiducie que le cédant peut révoquer en tout temps et dont il est le seul bénéficiaire. Comme le fiduciaire est effectivement un prête-nom, on se souvient que le texte fiscal n'y voit pas de disposition et, en conséquence, une réalisation des biens.

Malheureusement, ces règles sont inapplicables aux fiducies du Québec, lesquelles diffèrent essentiellement des « trusts » anglais. Aussi, perpétue-t-on les concepts de « legal ownership » et de « beneficial ownership », qu'on traduit par l'expression « propriété effective », toutes des expressions qui n'ont aucun sens pour un juriste du Québec. On fait une tentative de réconciliation de cette notion de propriété effective avec celle de « beneficial ownership », mais elle se révèle un pur emplâtre, une pièce mal collée sur les fiducies du Québec.

Mais il y a plus. Comme condition additionnelle pour éviter toute disposition, on ajoute que le fiduciaire doit être un mandataire à l'égard du bien qu‘il a reçu. Cette condition s'explique par une ambivalence reconnue par la jurisprudence anglaise sur la possibilité qu'une personne puisse cumuler les doubles attributs de fiduciaire et d'agent. Dans le cadre du Code civil du Québec, cette situation n‘a aucun sens. Une personne peut être soit un fiduciaire, soit le mandataire d'un tiers, mais pas les deux. Les biens du mandant n'appartiennent pas à son mandataire, tandis que ceux de la fiducie ne peuvent appartenir qu'à cette dernière.

En somme, on a construit un échafaudage qui tente de codifier pour les neuf provinces du Canada la situation d'absence de disposition malgré le transfert à un « trust », mais qui ne tient aucunement debout pour les six millions de Québécois. Il n'est pas trop d'espérer qu'après un quart de siècle de ce régime dit de la réforme fiscale, les Finances diffèrent quelque peu leur boulimie d'amendements pour se sensibiliser aux particularités du droit québécois[43].

Many authors have noted the absence of equivalence in fiscal legislation between these common law and civil law concepts (especially since the coming in force of the Civil Code of Quebec which allows more extensive use of the trust in this province). Can a trustee act both as a trustee and agent in Quebec civil law? Is there an equivalent to the concept of "bare trust" in Quebec civil law? Is there a disposition, within the meaning of fiscal legislation, when an individual transfers assets to a trust and the transaction is subject to the civil law? Can the fundamental differences between the civil law trust, based on the concept of a separate patrimony and the common law trust, based on that of dual ownership between the trustee and beneficiaries, be resolved in a fiscal context?

Despite the administrative position of the Canada Customs and Revenue Agency on these issues, which attempts to smooth over the differences between the common law provinces and Quebec, taxpayers of this province will only rejoice at the idea that solutions, reflecting the peculiarities of the civil law of the province of Quebec, are currently being analyzed and will be presented to the tax community in the coming months.

2.1.2 Security interest and the field of security

In common law, the right of ownership may be subdivided into a set of multiple rights ranging from a simple interest as a lessee to a fee simple, which is the most complete interest in a property. Thus, a person is said to own an interest in a property rather than the property per se. This principle derives from the doctrine of tenures and estates going back to the Middle Ages and the feudal system. The right of ownership can therefore be split into multiple interests and, as such, the security interest is no more than an interest in the property which exists independently from the other rights. On the contrary, in Quebec civil law there is no such fragmentation of the right of ownership for the purpose of securing the right or interest of a creditor. Although the creditor may, in specific cases, acquire a real right in the debtor's property, this does not constitute a form of right of ownership within the meaning contemplated in common law (beneficial ownership and legal ownership).

On the one hand, it is appropriate to question the approach of referring to such concepts while taking into account the two legal systems, in each language version. On the other hand, and more specifically, it is important to ensure that the mechanisms of deemed trust for the purposes of guaranteeing source deductions, provided for example in subsection 227(4) of the I.T.A., are well adapted to Quebec civil law. To that end, it is necessary, among other things, to ensure that the beneficial right provided for in the French version of subsection 227(4.1) of the I.T.A., in favour of Her Majesty, has as wide a scope and applies in the same way in Quebec civil law as the term beneficial ownership of Her Majesty in common law. On this score, we note that the Federal Court has recently affirmed, in a motion to oppose seizure of movables,[44] that the presumed trust of Her Majesty confers on Her Majesty a beneficial right in a trust whose patrimony is separate from that of the execution debtor. Her Majesty is deemed to hold such a beneficial right of ownership in the property despite any other guarantee, including a mortgage. In the same vein, what to say of garnishment, provided for in subsection 224(1.2) of the I.T.A. for the purposes of levying source deductions? Does it apply uniformly in Quebec civil law and the common law?

Moreover, federal tax legislation uses several terms to define the right or interest encumbering a property for the purpose of securing payment of a debt or performance of an obligation. Whether we think of garantie, sûreté or again the new definition of droit en garantie[45] proposed in subsection 123(1) of the Excise Tax Act, these terms are used indifferently as equivalent to the concepts of "security interest", "security" or even "guarantee".[46] The whole corpus of federal legislation would benefit not only from harmonization but also uniformization in this field.[47]

2.1.3 Acquisition and disposition of property

The concepts of legal ownership and beneficial ownership are, in the common law, key to determining the time of acquisition of a property. Are these common law concepts applicable in Quebec for the purpose of determining, among other things, if a transaction subject to a leasing agreement is equivalent to an acquisition as defined in tax legislation? A number of authors have also raised the problems encountered in the application of these very concepts, not only in the context of leasing, but also of company takeovers, agreements with retroactive effect and mortgage/hypothec foreclosures.[48]

2.2 Partnerships

Partnerships are a major fiscal vehicle of the I.T.A.[49] However, since the concept of partnership is not defined therein,[50] it is necessary to have recourse to the private law of the provinces to determine, in a given situation, if a partnership has been formed.[51]

Partnerships in the common law provinces and those in the province of Quebec are quite similar. In Quebec civil law, a partnership agreement is defined as being "by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits".[52]

In the common law provinces, a partnership is generally defined as being "the relation that subsists between persons carrying on a business in common with a view to profit".[53]

The first problem in connection with partnerships resides in the difficulty of determining if an agreement entered into by individuals earning income in common truly constitutes a partnership agreement. On the one hand, the agreement concluded by the taxpayers may prove to be a kindred legal institution such as co-ownership, joint possession or nominal expenditure company. In the context of Canadian bijuralism, this problem is exacerbated by the existence of entities similar to the partnership such as a joint venture, a consortium, a Nova Scotia Unlimited Liability Corporation,[54] etc. The label might also prove problematic in the context of the international tax system when taxpayers use hybrid entities, hailing from foreign legal institutions akin to partnership.

The second problem relating to partnerships has to do with the issue of determining if the partnership benefits from a legal personality separate from that of its members. For the purposes of income calculation, paragraph 96(1)(a) of the I.T.A. specifically provides that a partnership is deemed to be "a distinct person residing in Canada". On the other hand, for the other purposes of the Act, except as otherwise specified, a partnership does not have legal personality. The partnership is a vehicle for the partners and, as such, is exempted from filing tax returns, even though it is expressly subject to other obligations of compliance and filing of certain returns.

The treatment of a partnership not as a taxable entity, but as a vehicle, arises from the fact that in provincial private law the legal personality of a partnership is not generally recognized. Ms. Prieur noted in this connection:

La volonté législative [de ne pas reconnaître la personnalité juridique à la société de personnes] est appuyée sur les règles civiles qui, tant au niveau de la common law que du droit civil québécois, considèrent qu'une société de personnes n'est pas une personne morale distincte mais un simple véhicule intermédiaire qui naît sans aucune procédure formelle mais selon les agissements des parties en cause.[55]

On the other hand, it goes without saying that a general conclusion of this nature does not have unanimous support, especially since the coming in force of the Civil Code of Quebec. In fact, the existence of the legal personality of a partnership is very much disputed in doctrine and case law.

In the matter of Ville de Québec v. Cie d'immeubles Allard Ltée,[56]the Quebec Court of Appeal has recently ruled that a partnership does not have a patrimony separate from that of its partners. Me Marquette noted in this connection:

Si les conséquences de cette décision, notamment en matière fiscale […], n'ont pas manqué d'alerter les juristes, c'est que cette question n'a pas seulement un intérêt théorique […] mais également des incidences pratiques sur les modalités de fonctionnement des sociétés.[57]

In connection with this decision he also noted that:

[Cette affaire] aura un impact significatif sur le plan fiscal. En effet, si les associés sont présumés détenir directement en indivis les biens de la société de personnes, que faire des dispositions fiscales relatives aux transferts d'actifs entre les associés et la société de personnes? Ainsi, la caractérisation civile des attributs de la société de personnes a un impact significatif sur la fiscalité.[58]

The judgment rendered in Fournier v. Sous-ministre du Revenu du Québec[59] highlights, in the income tax environment, the problem of whether or not a partnership has legal personality. In this matter, the Quebec Ministry of Revenue had sent a notice of assessment to the law firm "Fournier Demers & associés". The partners of the firm then challenged the notice of assessment on the ground that it had not been sent to the appropriate party, a partnership not being a person within the meaning of the Act. The Ministry dismissed the legal argument put forward by the partners of the law firm, ruling that the partnership constitutes a body corporate separate from the partners. The Quebec Court, relying on the judgment rendered by the Quebec Court of Appeal in the case Ville de Québec v. Cie d'immeubles Allard Ltée, concluded that, under the authority of the Civil Code of Lower Canada, the partnership did not have legal personality and, therefore, could not be a taxpayer as defined in the Act. The Court however noted: [translation] "It should be underscored that the Court applies the provisions of the Civil Code of Lower Canada, and it is within the realm of belief that the situation would be different under the authority of the Civil Code of Quebec."[60]

Professor Charlaine Bouchard[61] of the Law Faculty of Laval University moreover notes that a partnership is endowed with a separate patrimony.

If the argument claiming that a partnership has a patrimony separate from its members were to be ultimately confirmed by the Courts, it might be possible to claim that a Quebec-based partnership is a person and therefore a taxpayer[62] for all the purposes of the Act, which would mark a considerable change in the application of the I.T.A. to partnerships. Moreover, this conclusion would lead to fundamental divergences between the treatment of partnerships in the common law provinces, where they are always devoid of a separate legal personality, and partnerships in Quebec.

So as to make the use of partnerships, as tax vehicles, less reliant on the uncertain evolution of doctrine and case law, it might be desirable to extend the presumption contained in paragraph 96(1)(a), relative to the separate personality of a partnership, to all the purposes of the Act and not to limit it to income calculation. Ms. Prieur noted in this respect:

La première présomption consiste à considérer la société de personnes comme si elle était une personne distincte. Aurait-il été plus efficace de l'inscrire immédiatement comme une « personne » à la définition du paragraphe 248(1) L.I.R. et d'éviter ces présomptions?[63]

2.3 Right or interest in property/droit dans ou sur un bien

The problems regarding the concepts of real and personal property (common law) and of movables and immovables (civil law) will be studied in depth with a view to determining the similarities and differences between the two major legal systems. Adjustments might be made to the provisions referring to these concepts so that the said provisions have a similar scope across Canada, to the extent that is possible.

Moreover, in common law there are differences between the terms "right in property" and "interests in property". In French common law, the corresponding concepts are droit dans ou sur un bien and intérêt dans un bien. Yet only "rights"/droits are recognized in the civil law, not intérêts "interests"/intérêts The question is how to harmonize the provisions that refer to the above-mentioned common law concepts without unduly expanding them or making them asymmetric? To highlight the problem, let us take the example of paragraph 85(1.1)(f) of the I.T.A. and apply to it some of the solutions recommended in Bill C-50 and S-4:

85(1.1) Definition of "eligible property"

For the purposes of subsection (1), "eligible property" means

(f) an inventory (other than real property or an immovable, an interest or a right in real property in an immovable or an option in respect of real property or an immovable);

85(1.1) Définition de « bien admissible »

Pour l'application du paragraphe (1), « bien admissible » s'entend :

f) d'un bien à porter à l'inventaire, à l'exception d'un bien immeuble ou bien réel, d'un droit ou d'un intérêt sur un tel bien et d'une option y afférente;

The addition to the French-language version of the common law concepts bien réel and intérêt sur un bien réel, and of the civil law ones of "immovable" and "right in an immovable" to the English‑language version, should be made in such a way as to prevent the "rights"/droits, as defined in the common law, from being referred to since only the "interests"/intérêts are concerned in the provision. The addition of "right in real property" would be manifestly problematic, since it would extend the scope of the provision to possibly include the term "licence".

2.4 "Leasehold interest"/Tenure à bail

Tax legislation draws on the concept of "leasehold interest"/tenure à bail in a variety of contexts, namely in the environment of "principal residence" and "capital cost allowance". This concept is unknown in Quebec civil law, since it is specific to the common law. The harmonization of provisions referring to these concepts will allay the uncertainty surrounding their application in the civil law context, an uncertainty which persists despite the efforts of the Canada Customs and Revenue Agency to define the concept.[64]

Several solutions are available to the harmonization expert to correct this unijuralism. It might be possible to find a concept in Quebec civil law equivalent to that of tenure à bail. The bail of the Civil Code of Quebec is definitely one of the options to consider. It will be necessary, however, to examine whether the ownership right conferred by the common law "leasehold interest" is key to the application of tax law, in which case any comparison with the civil law bail will prove impossible. Another approach to solving the problem would be to adopt a definition that might be given to the concept of tenure à bail. An exact characterization of the legal reality that lies behind this common law expression might help the Quebec taxpayer to delimit its scope.

Another problem which the harmonization team will address is that of equating the term "emphyteutic lease"/bail emphytéotique (now emphytéose) to "leasehold interest"/tenure à bail. This position is articulated in subsection 4 of Interpretation Bulletin IT-324[65] and complies with the Federal Court of Appeal judgment in the case Rudnikoff v. Queen, 75 D.T.C. 5008. On page 5011, the Chief Judge of the Federal Court of Appeal expressed the following opinion:

"There is, nevertheless, a distinction between ownership as defined in art. 406 cc. Namely: "the right of enjoying and disposing of things in the most absolute manner…" and "ownership" as given to an emphyteutic lessee, just as there is a difference between the rights of an ordinary lessee and an emphyteutic lessee. In the latter comparison, however, there is one common factor and that is the existence of a lease. In my opinion this common factor is sufficient to bring the emphyteutic lease within the term "leasehold interest" as used in the Regulations and I share this view with the Trial Judge."

However, this opinion does not appear to be shared by all civil law experts. In a text dealing with "emphyteusis"/emphytéose[66], Me François Frenette, of the Law Faculty of Laval University, argues that [translation] :

"the relation between "emphyteusis"/emphytéose and "leasing"/louage is at most verbal and is inadequate to veil the facet of reality ingrained in the right of emphyteusis".

In this respect, it will be necessary, therefore, to determine if equating emphyteusis with tenure à bail is consonant with the concepts found in the Civil Code of Quebec. In the affirmative, so as to impart a definite attribute to this administrative and jurisprudential rule, it might be possible to incorporate such equation in the I.T.A.

2.5 Implicit dissociation

The I.T.A. provides the standard example of a federal public law act that is superposed on to private law relations. As mentioned several times in the foregoing, when a provision of federal law draws on a private law concept without defining it or imparting to it a specific meaning, it is necessary to have recourse to the private law in force in the particular province. The federal government has nevertheless the power to create and define legal concepts or institutions regardless of their usual meaning in civil law or common law. Admittedly, the principle of complementarity of the civil law, when the concepts are not defined in fiscal legislation, is recognized in tax case law[67]. Nevertheless, certain concepts, including those of "employee"/employé, "independent contractor"/travailleur autonome, "residence"/résidence or "charity"/organisme de bienfaisance, while not defined in the Act, are systematically interpreted and applied in Quebec in the light of the common law concepts established by the federal courts. The principles derived from the judgments inWiebe Door Services Ltd. v. D.N.R[68] (characterization of a worker), Thomson v. D.N.R.[69](residence) or Pemsel v. Special Commissioners of Income Tax[70](charity) are now applicable uniformly across Canada, although they refer to private law concepts that sometimes vary substantially from the civil law to the common law.

This particular situation requires thinking on the system used as a backdrop to the federal tax legislation where certain private law concepts are concerned. Is there, in some specific cases, an autonomous federal tax law based on the common law that might forthwith discard the peculiarities of provincial law and especially that of Quebec civil law? In the affirmative, how are we to differentiate the concepts or principles in respect of which there is dissociation (explicit or implicit) from those for which there is complementarity? Is it necessary, in these particular cases, to provide for specific interpretation rules or even to define certain concepts in the Act?

2.6 The concepts of mandataire and "agent"

Federal tax laws frequently refer to the concept of mandataire in the French version and that of "agent" in the English version. In common law and civil law, these concepts cover cases where a person acts on behalf of another. Yet, in each of the legal systems, these terms have a special scope. Thus, in civil law, the mandate is an institution that has a specific framework in articles 2130 to 2185 of the Civil Code of Quebec, while the common law concept of "agency" seems to have a wider scope or, at least, does not seem the most appropriate equivalent.

In fact, when a federal act, like the I.T.A., pairs the terms "agent"/mandataire, the four legal audiences in Canada are likely to interpret these concepts in divergent ways, with all the consequences that might result on the fiscal level. Francophone civil law experts will refer to the Civil Code institution, while their anglophone counterparts will need more often than not to interpret the term "agent" which, although used in the Civil Code, does not in fact translate the concept mandataire. The common law audience, for its part, will refer more to the agency relation or even to the generic and current meaning of the term "agent".

These studies will attempt to determine if precisions are required in this area. The reviews and recommendations on this issue will have a focus not only on domestic law, but also on the international level where these same expressions are found in many fiscal agreements.

2.7 Harmonization and international law

The fiscal agreements signed between Canada and other countries contain references to a number of private law concepts, including employé, agent, mandataire, biens immobiliers, "immovable property". According to what legal system are these terms and expressions to be interpreted? For example, when it is necessary to characterize a resident of Canada and Quebec as an employee or an agent enjoying independent status, what legal rules are applicable? What happens in the case of a resident of another province?

In a similar vein, a resident of Canada (as defined in fiscal law) may choose to put in place an entity, under the legislation of another country, which is unknown in Canadian and provincial legislation. For the purpose of determining the fiscal implications of transactions involving a foreign or unknown entity or the fiscal treatment of income there from, it is appropriate first and foremost to qualify the intents of Canadian fiscal law. What legal system should serve as a basis for qualifying foreign entities? Quebec civil law? Common law? What factors are considered in choosing the particular legal system?

Finally, the process of harmonization of tax legislation with the civil law of the province of Quebec will impact not only on tax laws but also on the agreements signed between Canada and other countries. Are there changes or precisions to be made to the Income Tax Conventions Interpretation Act so as to ensure its effective application in the framework of harmonization of federal tax legislation? Does the adoption, in internal tax legislation, of terminology that is different from that used in fiscal agreements have an impact?

2.8 Licence

Federal tax laws, more specifically those relating to commodity taxes, refer to the concept of "licence" but, we may ask, what is a "licence"? In common law the term "licence" is generally defined as an act giving rise to a right of use without however creating a right of exclusive ownership nor an interest in the property:

A licence is in the nature of a right or privilege to enter upon and use the grantor's land in a certain manner or for a specified purpose. It is a personal right between the licensor and licensee and does not create any estate or interest in the land.[71]

Let us take, for example, paragraph 25(f) of Schedule V of the Excise Tax Act, which lists exempt supplies and reads as follows:

The supply of immovables by a public service agency (except a financial institution or government), excluding the following items:

(f) immovables, excluding temporary housing, supplied either by lease for a period of at least one month, or by licence, where the supply is made as part of the operation of a business by the agency;

An understanding of the scope of the concept of licence and of the inherent differences that make it distinct from a lease proves to be very important in the circumstances surrounding this provision. In the case of a lease for a term of one month or more, the supply is exempt, whereas it is not the case where the legal instrument is characterized more as a licence, whatever the duration. In the province of Quebec, when a public services agency grants such right of use to Quebec taxpayers, is the supply of service exempt or taxable under the Excise Tax Act? This issue has been studied by Revenu Québec, in its capacity as administrator of the Excise Tax Act in Quebec.[72]

The issue submitted to the tax authorities was to the effect of knowing whether the supply by a marina of seasonal mooring rights—use of a mooring pontoon for the season—was taxable (lease of less than a month) or tax exempt (licence or lease of one month and more). From the outset, Revenu Québec dismissed the possibility in Quebec of supply by licence of an immovable, this concept being non-existent there; the Revenu Québec analysis consequently dealt with lease alone. It concluded that the mooring pontoon was supplied under a lease of over 30 days, so that the supply was tax exempt. The relevant excerpt from the letter of interpretation is reproduced below:

[Translation] In civil law, contrarily to what prevails in common law, the fact that use of a property is granted exclusively or not changes nothing to the qualification of the agreement. The contractual terms and obligations may differ, but the agreement will continue to qualify as a lease agreement.

Based on the facts submitted, we are of the opinion that seasonal use of a mooring pontoon constitutes supply by lease of an immovable property for a period of over one month, which supply is not covered under the exception in paragraph (f), section 25, of part VI of schedule V of the federal Act. Consequently, such supply is exempt unless it is covered under one or the other of the remaining exceptions listed in section 25, part VI, schedule V of the federal Act.

The above example clearly shows that harmonization of the concept of licence is essential if the legislator wants to restore some equity between Quebec taxpayers and those of the common law provinces.


The program for the harmonization of fiscal legislation is taking off. One of its key objectives is to bring solutions to the more acute problems arising from the interaction between fiscal legislation and the civil law of the province of Quebec. In response to the comments of many authors in the province of Quebec, we may confirm that the Departments of Justice and Finance Canada, as well as the Canada Customs and Revenue Agency, are receptive to the peculiarities of the law of the province of Quebec and will work in consultation with the fiscal and university communities to adapt tax legislation to the Francophone and anglophone civilian reality of Quebec.

The Department of Justice has drawn up, in the light of recent doctrine and jurisprudence, a list of the harmonization problems that require special attention. Practitioners, professors and tax experts are encouraged to submit to the Department of Justice, through the APFF committee created for this purpose, any interaction problem between the civil law of the province of Quebec and federal tax legislation. The approaches to the solution of the various problems will be discussed in consultation with all the stakeholders of the tax community in the framework of the Symposium on the Harmonization of Fiscal Legislation to be held in the autumn of 2001.