TSG (Tax Specialist Group) - Residence of Trusts (Trusts)

The Supreme Court of Canada recently confirmed the decisions of two lower courts and ruled that a trust is resident where its central management and control is located. (The case is variously reported as Garron, St. Michael Trust Corp. and Fundy Settlement.) The Supreme Court held that the principles used in determining the residency of corporations should be applied to trusts. While this decision related to the residence of two Barbados trusts, it has implications for domestic trusts. Before this case, it was generally accepted that a trust is resident where the trustee is resident.

In arriving at its decision, the Supreme Court found that the management and control of the two Barbados trusts was exercised by the main beneficiaries, who were Canadian residents, and that the Barbados-resident trustee provided little more than administrative services.

Clearly, this decision has serious tax implications for both domestic and offshore trusts. A trust with Canadian resident beneficiaries, who effectively manage the trust by giving “directions” to the trustee, may come under attack by the CRA, who will assert that the trust has its central management and control in the Canadian province where the beneficiaries are resident and is consequently subject to Canadian federal tax and tax in that province.

Tax problems can be anticipated where a trustee is resident offshore, or where a domestic trust has a trustee resident in a lower-tax province such as Alberta, and the main beneficiaries, resident elsewhere, are accustomed to giving directions to the trustee.

Beneficiaries with interests in domestic or offshore trusts should be made aware of this important decision and its potential consequences. If the beneficiaries have been relying on the earlier understanding, that the trust was resident where the trustee was resident, they should immediately take action to ensure that the trustee exercises, and is seen to exercise, central management and control of the trust.

If the beneficiaries wish to provide advice and suggestions to the trustee, this must not appear to be any type of direction. If a beneficiary frequently offers “advice” or “suggestions” that are always accepted by the trustee, the CRA may succeed in asserting that the advice and suggestions are really directions and that the trust is resident where the beneficiary is resident.

As a result of this decision, the CRA may look back at earlier years that can still be assessed and question the residence of a trust where it is evident that the trustee was not managing the trust, but was merely providing administrative services.

Note also that non-resident trusts can be deemed resident in Canada under a complex set of rules (proposed section 94 of the Income Tax Act) which have not yet been enacted but which will be retroactive to 2007 if they are enacted in their current form. Where these rules apply, the beneficiary is generally liable for the trust’s Canadian tax that results from the trust being deemed resident in Canada.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.