SCC to Consider the Residence of Trust for Tax Purposes
The residence of trusts and other business entities for income tax purposes has long been a source of confusion. The Supreme Court of Canada will attempt to resolve that confusion in the St. Michael Trust cases, from which it recently granted leave to appeal.
The cases arise as conjoined appeals from the decision of the Federal Court of Appeal in St. Michael Trust Corp. v. Canada (sub nom. Garron (Trustee of) v. Canada). In both cases, the applicant was a Barbados-resident corporation that was the trustee of a trust with Canadian beneficiaries, which was settled by an individual resident in the Caribbean island of St. Vincent. The applicants sought a return of amounts remitted to the Canadian government by the purchaser of shares that had been disposed by the trusts, on the ground that the trusts was were residents of Barbados and thus exempt from Canadian tax pursuant to a tax treaty between Canada and Barbados. However, the Minister held that the trusts were residents of Canada, and issued assessments under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). This position was subsequently upheld by both the Tax Court of Canada and the Federal Court of Appeal.
In the Federal Court of Appeal, Sharlow J.A. found that the fact-driven "central management and control test" that is traditionally applied to determine the residence of corporations for tax purposes should also be applied to trusts, instead of a bright-line test based solely on the residence of the trustee. In arriving at this conclusion, she acknowledged that this was a novel point about which there was very little jurisprudence. Applying this test, Sharlow J.A. concluded that the central management and control of the trusts was located in Canada, with the beneficiaries, since they were the ones who made the substantive decisions regarding the trusts, whereas the trustees were only involved in the execution of documents and administrative, accounting and tax matters.
The Supreme Court of Canada's ruling in these cases will bring much-needed clarity to the test for the residency of trusts and other organizations in the income tax context. It will likely be of great significance to any businesses or individuals who rely upon trusts and foreign tax structures.
St. Michael Trust Corp., as Trustee of the Fundy Settlement v. R., 2011 CanLII 37241 (SCC)
St. Michael Trust Corp., as Trustee of the Summersby Settlement v. R., 2011 CanLII 37069 (SCC)
SCC Docket Numbers: 34056 and 34057
Date Leave Granted: June 23, 2011
Income Tax Act Supreme Court of Canada Tax Court of Canada tax treaty