Fundy Settlement v. Canada

The Supreme Court of Canada released its decision today in Fundy Settlement v. Canada, 2012 SCC 14 (CanLII), holding that the residence of a trust under the Income Tax Act, Canada is the place where the central management and control of the trust is exercised. This will not always be the same place as where the trustees or the majority of them reside.

In Fundy Settlement two Canadian business persons, Myron Garron and Andrew Dunin, set up trusts, using a corporate trustee, incorporated and resident in Barbados, to hold an interest in their business, through holding companies. I have written about the trusts and the planning in more detail in my post on the decision of the Tax Court of Canada, but suffice it to say, the trustee sold the shares of the holding companies at a substantial profit of about $450 million. The trustee argued that the trust was a resident of Barbados, which did not have capital gains tax. Canada Revenue Agency argued that the trust was resident in Canada, and subject to Canadian income tax.

Judge Woods in the Tax Court found that although the trustee was a resident of Barbados, decisions concerning the trust were made by the Mr. Garron and Mr. Dunin, with the assistance of their advisors in Canada. The trustee deferred to their directions, and did not have a large role in the management of the trust. She held that the residence of the trust for tax purposes was Ontario, Canada, rather than Barbados. The Federal Court of Canada upheld Judge Woods’s decision, and the trustee appealed to the Supreme Court of Canada.

The Supreme Court of Canada also upheld the Tax Court’s decision. The Supreme Court of Canada relied in part on provisions of the Income Tax Act, Canada that treated a trust as a person, and reasoned that for tax purposes the same tests should apply to a trust that apply to a corporation when determining residency. The Court said at paragraphs 14 and 15:

[14] On the other hand, there are many similarities between a trust and corporation that would, in our view, justify application of the central management and control test in determining the residence of a trust, just as it is used in determining the residence of a corporation. Some of these similarities include:

1) Both hold assets that are required to be managed;

2) Both involve the acquisition and disposition of assets;

3) Both may require the management of a business;

4) Both require banking and financial arrangements;

5) Both may require the instruction or advice of lawyers, accountants and other advisors; and

6) Both may distribute income, corporations by way of dividends and trusts by distributions.
As Woods J. noted: “The function of each is, at a basic level, the management of property” (para. 159).

[15] As with corporations, residence of a trust should be determined by the principle that a trust resides for the purposes of the Act where “its real business is carried on” (De Beers, at p. 458), which is where the central management and control of the trust actually takes place. As indicated, the Tax Court judge found as a fact that the main beneficiaries exercised the central management and control of the trusts in Canada. She found that St. Michael had only a limited role ― to provide administrative services ― and little or no responsibility beyond that (paras. 189-90). Therefore, on this test, the trusts must be found to be resident in Canada. This is not to say that the residence of a trust can never be the residence of the trustee. The residence of the trustee will also be the residence of the trust where the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident. These, however, were not the facts in this case.

I have a couple of comments on this case. First, this case does not preclude using trusts for planning to minimize taxes. But it is not enough for the legal paperwork to look good it you want the residence of the trust to be in another jurisdiction, whether in a different province of country. If you want the trust to have a different residence than yours for tax purposes, you must give a trustee in that jurisdiction real control and decision-making powers. You won’t be able to continue to call the shots.

Secondly, this decision relies in part on the provisions of the Income Tax Act, Canada that treat a trust as a person, which is different from the common law in Canada. It is possible that a trust can be a resident of Canada for tax purposes, but the law of a different jurisdiction might still govern the interpretation of the trust, or the enforcement of a beneficiary’s claim against a trustee for breach of trust. I don’t read the decision as saying that the central management and control test determines the residency of a trust for all purposes.