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Supreme Court Confirms “Management and Control” Residency Test for Trusts 

Supreme Court Confirms “Management and Control” Residency Test for Trusts

April 12, 2012
No. 2012-17


The Supreme Court of Canada (SCC) today released its unanimous decision in a case involving how a trust’s residency for tax purposes should be determined. The SCC upheld the decisions of the Tax Court of Canada and the Federal Court of Appeal that two Barbados trusts with Canadian beneficiaries are resident in Canada because the trusts’ central management and control is in Canada, even though the trustee resides in Barbados.


The SCC summarized its decision in Fundy Settlement v. Canada, 2012 SCC 14, (also known as St. Michael Trust Corp. and Garron Family Trust) by stating that, as with corporations, the residence of a trust should be determined by the principle that a trust resides for the purposes of the Income Tax Act (the Act) where its real business is carried on, which is where the central management and control of the trust actually takes place. The residence of the trust is not always that of the trustee. It will be so when the trustee carries out the central management and control of the trust where the trustee is resident.


In this case, however, the SCC found that the trusts are resident in Canada, since the central management and control of the trusts was exercised by the main beneficiaries, who are resident in Canada. Further, the SCC found that the limited role of the trustee, which was resident in Barbados, was to provide administrative services and it had little or no responsibility beyond that.


KPMG observation — Residency of corporations
Although the SCC's decision deals with the residency of trusts, its analysis is based on jurisprudence dealing with the residency of corporations. As a result, this decision may also be important where the residency of a corporation may be an issue.



In this case, a Barbados corporation is the trustee of two trusts, the beneficiaries of which are resident in Canada. When the trusts disposed of shares they owned in two Ontario corporations, the purchaser remitted about $152 million to the CRA on account of Canadian non-resident withholding tax from capital gains of about $450 million realized by the Barbados trusts on the sale of the shares.


The trusts sought the return of this withheld amount based on an exemption from Canadian capital gains tax under the Canada-Barbados tax treaty. Under this treaty, tax would only be payable in the country in which the seller (i.e., the trusts) was resident. The trustee claimed that because it was resident in Barbados, the trusts were also resident in Barbados. As a result, there would be no basis for withholding tax in Canada.


The CRA was of the opinion that the trusts were resident in Canada and the withheld tax was properly payable.


Both the Tax Court of Canada (TCC) and the Federal Court of Appeal (FCA) previously decided against the taxpayers in this case, finding that the two trusts were resident in Canada because their central management and control was in Canada even though their common trustee was found to be a resident of Barbados.


Corporations' residency test should apply to trusts
The SCC stated that subsection 2(1) of the Act is the basic charging provision, and its reference to a "person" must be read as a reference to the taxpayer whose taxable income is being subject to income tax. This is the trust, not the trustee. This follows from subsection 104(2) of the Act, which separates the trust from the trustee in respect of trust property.


The SCC found that many similarities between a trust and a corporation would justify applying the central management and control test in determining the residence of a trust, just as this test is used in determining the residence of a corporation. Some of these similarities between trusts and corporations include:


  • Both hold assets that are required to be managed
  • Both involve the acquisition and disposition of assets
  • Both may require the management of a business
  • Both require banking and financial arrangements
  • Both may require the instruction or advice of lawyers, accountants and other advisors
  • Both may distribute income, corporations by way of dividends and trusts by distributions.


The SCC agreed with the TCC judge's finding that "the function of each is, at a basic level, the management of property". As such, the SCC stated that, as with corporations, residence of a trust should be determined by the principle that the trust resides for the purposes of the Act where "its real business is carried on", which is where the central management and control of the trust actually takes place.


The SCC also agreed with the TCC judge that adopting a similar test for trusts and corporations promotes "the important principles of consistency, predictability and fairness in the application of tax law".


CRA's alternative arguments
The CRA had argued in the alternative that the trusts were deemed resident in Canada under the rules that apply to non-resident trusts in section 94 of the Act. The CRA further argued that the general anti-avoidance rule (GAAR) in section 245 of the Act should apply to deny the tax benefit to the trusts.


The SCC stated that, given its conclusion that the trusts are resident in Canada under common law principles, it is not necessary to consider the arguments about the non-resident trust rules or GAAR.


KPMG observation

In light of the SCC's acceptance of the central management and control test for determining the residency of a trust, you should review the residence of any trust, including your family trust, that you have treated as resident in a particular province or another country.


Your review will need to confirm that the trust is indeed resident in the intended jurisdiction for tax purposes. If not, the tax-effectiveness of the trust could be compromised.


We can help
Your KPMG adviser can help you assess the impact of this decision on tax planning arrangements involving trusts where residence of the trust is an important factor. We can also help you develop a strategy for holding your business and family property tax-effectively. For details, please contact your KPMG adviser.


Information is current to April 12, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.

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