SCC Releases Landmark Decision on Trust Residence for Income Tax Purposes

The Supreme Court of Canada (SCC) released its decision in Fundy Settlement v. Canada (2012 SCC 14). This case was the SCC's first opportunity to consider the appropriate test for determining the residence of a trust for tax purposes.

Prior to this case, the only Canadian decision on the issue was the 1978 Federal Court decision in the Thibodeau Family Trust case, which was commonly referred to as judicial authority for the proposition that the residence of a trust is always determined by reference to the residence of its trustee.

In its assessment of the Fundy settlement, the Minister challenged the trustee residence test advanced by the taxpayers. Both the Tax Court of Canada and the Federal Court of Appeal agreed with the Minister that the appropriate test was the corporate “central management and control” test (CMC test). In a brief 19 paragraph decision, the SCC upheld the appellate decision and determined that the CMC test was equally applicable to trusts.

The facts of the case are complex, but at its core the case was about a trust that had a Barbados-resident trust company as its trustee and Canadian-resident individuals as the beneficiaries. When the trust disposed of shares of an Ontario corporation, it remitted withholding tax to the Minister of National Revenue on account of the capital gain realized by the trust. The trust then sought to obtain a refund of the Canadian withholding tax on the grounds that the trust was resident in Barbados and, thus, exempt from Canadian capital gains tax under the Canada-Barbados Tax Treaty.

The Minister challenged this position, asserting that the trust was resident in Canada because the role of the trustee was limited and the Canadian-resident beneficiaries were actually managing the trust. The SCC concluded that, as with corporations, the residence of a trust should be determined by the principle that a trust resides where its real business is carried on, that is where the central management and control of the trust actually takes place.

In reaching its decision, the Court determined that the similarities between a trust and a corporation justify application of the CMC test in determining the residence. The Court concluded that the function of both is the management of property and that the application of the CMC test to trusts would promote consistency, predictability and fairness.

The SCC did not reject the possibility that the residence of a trust could coincide with the residence of its trustee, but only when “the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident.”

In the Fundy case, it was found that the Canadian-resident beneficiaries were managing the trust with the result that the trust was resident in Canada.

Douglas Mathew, Matthew Williams and Mark Barbour of Thorsteinssons LLP were solicitors for the appellants.
Anne Turley, Daniel Bourgeois and Eric Noble of Justice Canada were solicitors for the respondent.