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:
Nominee companies are still commonly used in real estate structures for three non-tax reasons:
- 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
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.
- 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.
- 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.
- 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.
KPMG LLP, Toronto