Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

Fund sponsors in Canada continue to rely heavily on limited partnerships (LPs) for private investment vehicles, although trust structures remain important for certain investment strategies, tax objectives and investor expectations. A trust-based fund, whether structured as a mutual fund trust (including real estate investment trusts) or a bespoke private trust, may provide flow-through tax treatment, familiar governance arrangements and structural flexibility for income-oriented strategies. At the same time, trust structures may introduce more formal fiduciary obligations and increase the likelihood of “investment fund” characterization under securities legislation, potentially engaging additional registration, disclosure and compliance considerations, particularly where mutual fund-style redemption rights and pooled investment characteristics are present.

Determining whether a trust structure is appropriate is ultimately a legal and tax exercise rooted in the fund’s strategy, investor profile, operational model and compliance capacity. Many emerging managers focus on perceived tax advantages while underestimating the governance burdens imposed on trustees and the degree of ongoing monitoring required to maintain income-tax eligibility. This article provides a detailed analysis of trust structures for private funds with a focus on Ontario.

Trust Structures Versus GP/LP Funds

Trust and LP structures serve different commercial and operational objectives. In the Canadian private fund market, limited partnerships remain the dominant structure for private equity, venture capital and institutional alternative funds because they provide contractual flexibility, tax transparency and reduced governance formality. GP/LP arrangements also accommodate carried interest waterfalls, special allocations and long-term illiquid investment strategies more naturally than trust structures.

Trust structures are more commonly used where the fund strategy emphasizes passive income generation, recurring distributions or investor liquidity. Real estate income funds, mortgage investment vehicles and certain credit or yield-oriented products often use trusts because investors are familiar with unitized trust structures and distribution mechanics can be administered efficiently through trustee-managed arrangements. Trust structures may also be attractive where the sponsor expects participation by registered plans or intends to position the vehicle for broader retail distribution or eventual public-market access.

Notably, trust structures offer administrative advantages for a large investor base. Where a fund has hundreds of investors, a mutual fund trust structure can simplify tax reporting and investor administration through standardized trust allocation and T3 reporting processes. In contrast, GP/LP structures with many investors may involve more complex partnership allocation mechanics, T5013 reporting obligations, adjusted cost base tracking and investor-specific tax calculations. As investor numbers increase, these administrative burdens can become materially more significant in an LP structure, particularly for income-oriented or retail-facing funds.

The choice between a trust and an LP is rarely driven by tax treatment alone, since both structures can generally be organized on a tax-efficient basis. In practice, the more important considerations involve governance, investor liquidity, allocation flexibility and administration complexity. Trust structures are more commonly associated with formal fiduciary oversight and widely held investment funds, while LPs generally offer greater flexibility for smaller private fund operations.

Regulatory Framework and Sources of Law

A trust fund rests on a combination of trust law, securities regulation and tax law. Unlike corporations and partnerships, trusts in Ontario derive from common-law and equitable principles as shaped by the Trustee Act (Ontario) and related jurisprudence. The declaration of trust is the constituting instrument. It outlines trustee appointment and removal, fiduciary duties, investment powers, conflict-of-interest mechanisms, valuation principles and unitholder rights. Trustees hold legal title to assets for the benefit of unitholders, and courts apply strict fiduciary standards to trustee conduct, including duties of loyalty, prudence and impartiality.

From a securities perspective, units of a private trust will generally constitute “securities” under the Securities Act (Ontario). Private trust funds therefore must rely on prospectus exemptions under NI 45-106 ‘Prospectus Exemptions’ when raising capital. The accredited investor exemption remains the most relied upon exemption, although trust funds seeking access to a broader retail investor base may rely on the offering memorandum exemption, which carries additional disclosure and financial statement requirements. 

If the trust offers redemption rights or otherwise operates as a pooled investment vehicle with centralized management, securities regulators may characterize it as an “investment fund” under applicable securities legislation, including the Securities Act (Ontario). That characterization may affect adviser and investment fund manager registration analysis and may engage certain obligations under NI 81-106. However, privately offered exempt-market funds generally face a materially narrower compliance regime than publicly offered retail mutual funds.

Open-ended trust structures also require careful consideration of redemption mechanics and valuation procedures. Where underlying assets are illiquid, sponsors should evaluate whether redemption rights, suspension provisions, redemption gates and valuation discretion mechanisms appropriately address liquidity mismatch risk and protect remaining unitholders.

Registration rules under NI 31-103 ‘Registration Requirements, Exemptions and Ongoing Obligations’ may apply to trust structures. If a manager exercises discretionary investment authority on behalf of the trust, that entity may require registration as an adviser. If the trust is an investment fund, the manager may require registration as an investment fund manager unless an exemption applies. Distribution activities conducted by the sponsor or manager may trigger dealer registration.

Trust structures also interact closely with the Income Tax Act (Canada). Many private funds seek to qualify as mutual fund trusts or, for certain public structures, real estate investment trusts, each of which is subject to strict statutory tests involving asset composition, income characterization and unitholder base. Sponsors must therefore coordinate securities law compliance with tax qualification and ongoing monitoring to preserve flow-through status.

Definitions and Thresholds

Key legal definitions determine whether a trust structure is appropriate. A trust fund is typically defined by its declaration of trust as a unit trust established to hold and manage investment assets for the benefit of its unitholders. In contrast with an LP, where the general partner has managerial authority, a trust vests formal legal authority in its trustees. This shift materially affects governance and fiduciary risk. Trustees may incur personal liability in connection with trust obligations unless liability is appropriately limited through the declaration of trust, indemnification provisions and contractual limited-recourse language. Although Ontario courts generally enforce properly drafted limitation provisions, trustees remain subject to fiduciary obligations and may still face liability for bad faith conduct, fraud or breaches of trust.

For tax purposes, trust structures hinge on statutory qualification tests. A mutual fund trust (MFT) must satisfy the public distribution and investment restriction requirements in s. 132 of the Income Tax Act (Canada). Certain publicly distributed real estate trusts may also seek REIT qualification under the Act to avoid SIFT taxation, which requires ongoing compliance with detailed income and asset composition tests. These rules introduce monitoring obligations that generally do not arise in the same manner for LP structures.

Securities thresholds also play a defining role. The accredited investor definition in NI 45-106, s. 1.1 continues to dictate the investor universe for most private trust funds in Ontario. If a trust relies on the offering memorandum exemption, investment limits for non-accredited ‘eligible’ investors apply, and additional disclosure requirements must be satisfied. On the regulatory side, the threshold question remains whether the trust constitutes an “investment fund” under applicable securities legislation. That analysis depends on factors such as unitholder control, redemption rights, the nature of the trust’s activities and whether the trust operates an active business. Investment fund characterization may engage obligations under NI 81-106 and related registration requirements. This determination materially affects registration and disclosure expectations.

Finally, dealer registration thresholds under NI 31-103 determine whether the sponsor’s capital raising activity constitutes being in the business of trading. Frequent capital raises, promotional activity and compensation tied to fundraising may trigger registration even when the issuer relies on a prospectus exemption. Many private funds distribute securities through a registered exempt market dealer (EMD), which may allow the issuer or sponsor to rely on the NI 31-103, s. 8.5 exemption where trades are made solely through a registered dealer. That approach requires careful control over issuer solicitation, investor contact and compensation arrangements.

Application in Practice

A trust structure is principally governed by its declaration of trust, which establishes the trustees’ powers, governance framework, valuation authority, distribution procedures, conflict-management rules and amendment mechanics. Careful drafting is particularly important because trustees hold legal title to the fund assets and remain subject to fiduciary duties under Ontario trust law. The declaration of trust should therefore clearly address liability limitations, indemnification protections, decision-making authority and oversight procedures appropriate for the fund’s operational model and regulatory obligations.

The sponsor typically establishes a management entity to provide investment management and administrative services. The management agreement allocates discretionary authority, establishes compensation arrangements and sets reporting obligations. This agreement is critical in determining whether the manager requires registration as an adviser or investment fund manager (IFM) under NI 31-103. If the trust engages in pooled investing and offers redemption or withdrawal rights, the likelihood of investment-fund characterization increases, potentially engaging investment fund manager registration analysis, financial reporting obligations, valuation oversight expectations and additional disclosure considerations.

Offering documents follow. For accredited-investor-only funds, a private placement memorandum is commonly used. For funds targeting eligible retail investors, an offering memorandum under NI 45-106 is required. These documents include disclosure of strategy, risks, tax considerations, trustee governance, valuation methodologies and potential conflicts. Disclosure must be balanced and consistent with marketing materials. Investors must receive the offering materials in advance of subscription, and issuers must file Form 45-106F1 on SEDAR+ for each applicable province within the prescribed timeframe after each distribution.

Operationally, trust funds must maintain governance infrastructure that reflects their fiduciary obligations. Trustee meetings, minutes, oversight processes and conflict management procedures require ongoing attention. Valuation policies should be consistent with applicable accounting standards and disclosed methodologies and should be reviewed periodically. If the trust seeks to qualify as a mutual fund trust, ongoing tax compliance testing should be conducted to ensure compliance with statutory thresholds.

Care is required where affiliates participate in valuation, property management, servicing or other related-party operational functions.

Compliance Checklist

• Define fund strategy and investor base
• Confirm trust structure suitability
• Determine mutual fund trust eligibility
• Assess NI 81-106 applicability and NI 31-103 registration triggers
• Draft declaration of trust and governance framework
• Prepare NI 45-106 compliant disclosure documents
• Verify investor eligibility and maintain AML/KYC records
• File Form 45-106F1 as required
• Monitor tax qualification and valuation compliance
• Maintain trustee fiduciary oversight and governance records

Conclusion and Next Steps

Whether a trust structure is appropriate for a private fund depends on the fund’s strategy, investor expectations, tax planning objectives and operational capacity. Trusts offer flow-through tax treatment and familiar governance arrangements but are more commonly associated with “investment fund” characterization under securities law. Sponsors must evaluate their regulatory obligations under NI 45-106 and NI 31-103, assess whether the “investment fund” characterization may engage obligations under NI 81-106 or related registration requirements and ensure that their tax and governance structures align. Thoughtful structuring at the outset can support long-term scalability, reduce compliance risk and enhance investor confidence.

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If you are forming, restructuring, or operating a private investment fund in Canada, contact us to schedule an initial consultation with Nick Wright.