A recent landmark decision of Fundy Settlement v. Canada, 2012 SCC 14, issued by the Supreme Court of Canada (the “SCC”) on April 12, 2012, has clarified the rules for determining where a trust is resident for the purposes of the Income Tax Act (Canada).
The SCC, in its reasoning, set out that the determination of the residency of a trust for the purposes of the Income Tax Act, should be made following the established test for the residency of corporations. Residency for corporations is determined to be where the central control and management of the corporation actually takes place.
In this case, the St. Michael Trust Corp. (a corporation resident in Barbados) was the trustee (the “Trustee”) of two trusts that were originally settled in the Caribbean. The beneficiaries of the trusts were residents of Canada. The trusts disposed of shares resulting in $152 million dollars being withheld by the purchaser to be remitted to Canada Revenue Agency (“CRA”) as withholding tax on capital gains that were realized on the sale.
The Trustee and the Minister of National Revenue (the “Minister”) had a clear difference of opinion as to if the withholding tax should be paid or not and the deciding issue was based on where the trust was determined to reside. The Trustee argued that the residence of the trust would be determined to be the same place as the residence of the trustee, which in this case would be Barbados. Any capital gains realized on the sale would be taxed under the law of Barbados in accordance with a tax treaty between Canada and Barbados. It just so happens that Barbados does not have capital gains tax and the amount of tax payable would therefore be nil.
The Minister did not agree with this view and was of the opinion that the trusts are resident in Canada because the central management and control of the trusts was carried out by the beneficiaries, who were resident in Canada.
The SCC of Canada ultimately decided that the test to determine residency of corporations would also be applied to the test to determine residency of trusts. Therefore the Minister’s argument prevailed and it was found, on the facts, that as the beneficiaries had exercised the main management and control of the trust from Canada, the capital gains realized by the trust was determined to be taxable in Canada.
What does this mean for overseas trusts that have Canadian beneficiaries? Ultimately, the determination of residency will be based on the facts applicable to each case. Beneficiaries of overseas trusts who are located in Canada will need to ensure that the overseas trustee carries out the central management and control of the trust. In this case the trustee had a limited administrative role with little or no responsibility beyond that, they would execute documents when required, but the beneficiaries made the decisions.
This decision from the SCC does not mean that all overseas trusts will be taxed in accordance with Canadian laws but care needs to be taken so that the beneficiaries do not exercise the management and control of the trust from Canada.
Should you have any trust related questions we would be happy to assist you.