Deposits And Agreements Signed "In Trust": A Persistent But Avoidable Trap

Purchasing land can be a major decision for a business and, in making that decision, equal consideration should be given to tax planning and intended ownership structure. If a purchaser is not prepared to make such decisions upon signing the purchase agreement, the principal or party related to the purchasing business may opt to sign a purchase agreement "in trust for a company to be incorporated".

This approach is permitted under Section 21 of the Ontario Business Corporations Act,¹ which provides that a newly incorporated corporation can be bound by contracts signed in its name prior to incorporation if the corporation adopts the agreement in writing. In such cases, the party signing on behalf of the non-existent purchaser is referred to as the "promoter". The promoter is automatically deemed to have liability under that contract² unless the agreement contains express intention that the promoter is not to be bound by the terms of the contract.³