Business Law

Registering Trusts in Quebec: New Rules

Jun 13th, 2014

By Daniel Frajman

Since 1994, when the Civil Code was amended to allow for a broad use of trusts, there has been an explosion in the number of trusts constituted in Quebec.  Trusts are being used for a variety of purposes, such as tax-planning, income-splitting, holding investments or real estate, and even operating businesses.

All those who administer or have an interest in a trust should be aware of the following new rule:  as of July 1, 2014, based upon an amendment to Québec’s Act respecting the legal publicity of enterprises (the “Legal Publicity Act”), any trust (regardless of the jurisdiction where it is formed and regardless of the law governing the trust) that operates a “commercial enterprise” in Quebec will have to register under the Legal Publicity Act, much in the same way that corporations carrying on activity in Québec are currently required to register under the Legal Publicity Act.

“Enterprise” is defined at article 1525 of the Civil Code of Québec.  A leading decision on the concept is the Quebec Superior Court case of Belinco Développements Inc. v. Bazinet, [1996] R.J.Q. 1390.

The initial registration fee will be $319, and then declarations will have to be filed annually. Once an entity registers under this legislation, its name then appears on the website of the Québec Enterprise Register, and its address, the names of certain of its principals and certain related information will appear on the website along with the entity’s name. While the consequences of a failure to register are not terribly severe, parties with whom trusts deal, such as their banks, and possibly in the future the tax department, may require proof of registration.

All trusts will therefore have to address the issue of whether they operate a “commercial enterprise” in order to determine whether they are required to register under the Legal Publicity Act.

Our view concerning the concept of commercial enterprise, based on case law and commentary relating to both Québec civil law and similar distinctions in tax law, is that a family trust that is used for estate planning purposes (for example, income splitting), and that simply owns shares in operating or holding companies, would not be considered to be carrying on a commercial enterprise simply by owning such shares.  As such, most family trusts created for estate-planning purposes would not have to register under the Legal Publicity Act.  This is because, in our view, in order for a trust to be carrying on a commercial enterprise, there has to be a certain degree of organization in the trust’s activity beyond just owning property, and there often must be another party receiving goods or services from the trust.

For example, a trust that owns a portfolio of real estate which the trust actively manages itself, or a portfolio of marketable securities that are traded by the trust in a businesslike fashion, is likely carrying on a commercial enterprise with regard to those assets, and the trust would therefore have to be registered under the Legal Publicity Act.  On the other hand, and to borrow expressions from tax law, a trust that is a passive (rather than active) investor with regard to assets it owns (such as securities, or perhaps even real estate where, say, one property is owned by the trust but management of the property is entirely delegated to another party) is likely not carrying on a commercial enterprise and therefore would not have to be registered under the Legal Publicity Act.

The Québec Enterprise Registrar has indicated in informal conversations that a simple family trust created for tax-planning purposes would not be required to register, although it is unlikely this will be confirmed by the Registrar in writing.

It should be noted that by way of exception, where a trust operating a commercial enterprise is administered by an entity which is itself a registrant under the Legal Publicity Act (typically a trust company or similar financial institution), the trust itself need not register.

If you are a trustee or a beneficiary of a trust, or help to administer a trust, please do not hesitate to contact us to clarify if your particular situation requires your trust to register under this new rule.

Daniel Frajman, a shareholder of Spiegel Sohmer, a Montreal law firm, negotiates and drafts contracts for business and real estate sales and purchases, leases, debt and equity financings, shareholders’ agreements, trusts, wills, and for non-taxable non-profit and charitable businesses.