April 12, 2012
Supreme Court Confirms “Management and Control” Residency Test for Trusts
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
residency test should apply to trusts
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”.
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.
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.
KPMG LLP, the audit, tax and advisory firm (kpmg.ca), a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
KPMG's Canadian Web site is located at http://www.kpmg.ca/
© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.