Why Are Bare Trustees So Prevalent in Real Estate Structures?

Real estate businesses use single-purpose corporations referred to as "nominee companies" to hold the legal title to land while the beneficial interest is held in a separate entity. Historically, nominee companies allowed a beneficial owner to sell real estate without triggering land transfer tax by selling the shares of the nominee rather than the land itself; this is still possible in British Columbia (although there are proposals for change), but not in other provinces. Now, non-tax reasons largely explain the prevalence of such arrangements.

A trust relationship in which the trustee performs no activity except actions dictated by the beneficiaries is referred to as a bare trust. Nominee companies, acting as bare trustees, simply hold legal title to land; all the risks and rewards of ownership remain with the beneficial owner. While it is not required in order to create a trust, a written legal agreement is important to evidence the relationship (particularly in the event of a CRA audit) and facilitate the transfer of legal title.

Tax rules accommodate bare trusts, but they are rarely the reason for their existence:
  • For income tax purposes, a bare trust is ignored under subsection 104(1) because the trust can reasonably be considered to be acting as agent for all beneficiaries (De Mond Jr. v. The Queen, 1999 CanLII 466 (TCC)). All income earned on the real estate, and any gain or loss on the sale of the real estate, belongs to the beneficial owner of the land, not to the bare trustee. Therefore, nominee companies are disregarded for income tax purposes and do not report any taxable income.

  • A nominee company cannot register for GST/HST purposes because the mere holding of legal title to land does not constitute a commercial activity, which is a prerequisite for GST/HST registration. The beneficial owner of the land must register and account for GST/HST, both on the purchase of the land and in respect of the development expenses. Therefore, the nominee company is also disregarded for GST/HST purposes.

Nominee companies are still commonly used in real estate structures for three non-tax reasons:
  1. Nominee companies provide anonymity. Because it is relatively easy to search land registries for the legal title holder, anonymity is particularly important when a developer is purchasing a number of adjacent parcels of land. If landowners know that one buyer is strategically building an assembly of land parcels for a large real estate development project, they may hold out and demand higher prices. But anonymity may be disappearing: British Columbia has proposed the creation of a beneficial ownership registry for land in the province.

  2. Nominee companies provide flexibility when there are multiple beneficial owners of real estate. If parties undertake a joint venture in respect of real estate, all of the parties are required to register on the title to the land in the absence of a nominee company. In addition, the land registry must be updated if a new party joins the joint venture. Incorporating a nominee company allows for a single legal title holder, and new joint venturers can acquire an interest in the nominee without having to register changes at the land registry office.

  3. Tenants that rent space and banks that provide mortgage financing will want to sign agreements with the legal owner of the land, whose identity can be verified at the land registry office. Having one legal title holder rather than several makes it easier to draft agreements. Note, however, that the CRA may try to deny ITCs when invoices are addressed to the nominee rather than to the beneficial owner or the operator of the joint venture. Having the bare trustee agreement explicitly state that the nominee company acts as an agent for the beneficial owners makes it easier to defend ITC claims.

Nominee companies must be incorporated and maintained and are required to file annual corporate tax returns, giving rise to administrative costs. However, because of the flexibility they offer and their ubiquity in the industry they are commonly used in real estate structures, particularly when real estate is co-owned.

Stephen Canis
KPMG LLP, Toronto

Canadian Tax Focus
Volume 8, Number 3, August 2018
©2018, Canadian Tax Foundation