SCC Pulls Back the Curtain on Trust Residence
The Supreme Court of Canada has recently clarified in Fundy Settlement v. Canada that for the purposes of Canadian taxation the residence of a trust is where the central mind and management resides. This decision, confirming both the Tax Court of Canada and the Federal Court of Appeal lower court decisions, is a major departure from the Canada Revenue Agency’s (CRA) 30 year old administrative position that generally considered the residence of the trust as being the same as the residence of the trustees.
At its simplest, the Fundy Settlement case involved two trusts (the “Trusts”) which owned shares of two Canadian corporations. The Trusts were settled in the Caribbean with a Barbados corporation, St. Michael’s Trust Corp., acting as the trustee. The beneficiaries of the Trusts were in Canada. The expectation was that when the Trusts sold their Canadian shares there would be no Canadian capital gains. The Trusts believed that since their trustee was located in the Barbados, the trusts would also be considered as being resident in Barbados allowing for the tax exemption benefits under the Canada-Barbados tax treaty.
The problem with the arrangement was that the trustee, St. Michael’s Trust Corp of Barbados, was not very active in its management of the trust. Justice Woods of the Tax Court of Canada made the factual determination that the trustee provided only administrative services with little or no other responsibility. All of the real decisions made for the Trusts were made by the beneficiaries in Canada.
The main question before the Court was to determine the proper test for establishing the residence of the trust.
The Trusts’ position was that they were resident in the Barbados as consistent with the long standing CRA administrative position in Interpretation Bulletin IT-447 which stated that “a trust is generally considered to reside where the trustee… who manages the trust or controls the trust assets resides.”
The Crown’s position was that the same test should be applied to trusts is as currently applied to corporations. In Canada, the test for corporate residence is the location of the central management and control. If the corporate test were to be applied to the Trusts the evidence was clear, it was the beneficiaries, and not the trustees, who made the real decisions for the trusts and those beneficiaries resided in Canada. So the Trusts would be resident in Canada and taxable.
In determining the case in favour of the Crown, the unanimous Court considered the “many similarities between a trust and corporation that would, in our view, justify application of the central management and control test” (at para 14) before ultimately finding:
“adopting a similar test for trusts and corporations promotes 'the important principles of consistency, predictability and fairness in the application of tax law' . As [Justice Woods] noted, if there were to be a totally different test for trusts than for corporations, there should be good reasons for it. No such reasons were offered here.” (at para 16)
Similar to Toto’s reveal of the old man behind the Wizard of Oz, the Supreme Court has confirmed that the curtain must be pulled when considering the residence of a trust in order to establish who is really controlling a trust’s decisions. This has major significance for tax planners and trustees who must now review their foreign arrangements to determine not only if it is the trustees, the settlers, or the beneficiaries who are making the major decisions, but also where those major decisions are to take place, and how those decisions are documented and executed. Similar considerations are often made by corporations in arranging their board of directors meetings in order to establish or maintain residence a chosen jurisdiction. Going forward trustees and beneficiaries of intended foreign trusts must consider doing likewise.
What makes this decision unique is that the decision was written unanimously and anonymously by “The Court”. Such ‘per curiam’ decisions in Canada are rare and are typically reserved to show unity in important and controversial cases such as the Reference re Quebec Secession. However, there was nothing unique or controversial about Fundy Settlement, a routine tax appeal, and the Court’s judgement was short and efficient. The strong signal from this decision, building on the recent Copthrone decision, is that going forward we can expect the Court to show unity on tax matters. This is a major contrast to just three years ago where a highly divided Court wrote three separate sets of divergent reasons in Lipson.
Fundy Settlement v. Canada, 2012 SCC 14
SCC Docket Numbers: 34056; 34057
Date of Decision: April 12, 2012
Canada Revenue Agency central mind and management Federal Court of Appeal residence of a trust Supreme Court of Canada Tax Court of Canada