Residency of a Trust

March 21, 2010 | Gail P. Black, KC

On September 10, 2009, the Tax Court of Canada released its decision in Garron Family Trust  v. Her Majesty the Queen and several other cases heard on common evidence (“Garron”).   The Court held that two Barbados Trusts were resident in Canada for purposes of the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the “Canada-Barbados Treaty”).  Over $450 million in capital gains were realized by the two Trusts on the disposition of shares of Canadian corporations.  Under Barbados domestic law, the gains were not subject to tax. The Trusts claimed they were exempt from Canadian tax under the Treaty.  The Minister disagreed and assessed accordingly.  The Trusts appealed.  The Tax Court of Canada dismissed their appeals.  This case is now under further appeal.

New Test for Residence of Trusts – Central Management and Control

In Garron, Justice Woods rejected the notion that the oft-cited Federal Court decision in Thibodeau (78 D.T.C. 6376) stands for the proposition that the residence of a majority of the trustees is always the deciding factor in determining the residence of a trust.  Rather, the court adopted a central management and control test for the residency of trusts.  Justice Woods concluded that the “judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate.  That test is ‘where the central management and control actually abides'”.

Factors in Determining Central Management and Control

In finding that the central management and control of the Trusts was located in Canada with the two Canadian principals, either directly or indirectly through their advisors, rather than with the Barbados-resident Trustee, the court took a number of factors into account.  These factors included:

  1. The “protector” of the Trusts could replace the Barbados trustee and the Canadian principals with their spouses could replace the “protector”;
  2. The internal memoranda of the Trustee evidenced a role actually more limited than the trust documents suggested;
  3. Investment decisions appeared to be at the direction of the Canadian principals with Canadian investment advisors;
  4. There was virtually no documentation showing that the Barbados Trustee took an active role in managing the Trusts;
  5. The documentary evidence was consistent with the Barbados Trustee being involved for the most part only in the execution of agreements, and in administrative, accounting and tax matters;
  6. At the relevant time, the Barbados Trustee was the arm of an accounting firm which provided significant tax advice regarding the overall offshore structure of the property held by the Trusts.  It was questionable whether the Barbados Trustee had expertise in managing trust assets as opposed to the firm’s significant expertise in accounting and tax matters;
  7. There was no evidence that the Canadian principals were very interested in what the Barbados Trustee was doing and that the persons involved were competent, as would have been the case if the Barbados Trustee was actively involved in the sale of the shares at issue;
  8. The contact with the bank, the Bahamas branch which was used for the bank account of one of the Trusts, was made in Toronto;
  9. The directors of the Barbados Trustee had very little information regarding transactions to be approved before the directors ratified the transactions; and
  10. One of the Canadian principals oversaw the sale of the shares.

The Court indicated that it could not be assumed that the Barbados Trustee did whatever was required to make sure the transactions undertaken by the Trusts were in the best interests of the beneficiaries.  On this point, Justice Woods found that there was no evidence that the operator of the Barbados Trustee had expertise or significant experience in trust management nor was it a well-recognized trust corporation with significant experience and expertise in managing trusts.

Implications for Other Trusts

The analysis by the Court in Garron on determining the residency of a trust is of interest not just for offshore trust planning, but also for inter-provincial trust planning where it is intended that the trust be considered resident in a lower-tax province.  From a practical perspective, Garron highlights that one should not rely solely on the lower-tax province residence of the trustee, or majority of the trustees, to support the residence of a trust in a particular province for tax purposes.  It is generally advisable that as many other indicators as possible and otherwise appropriate be used, and documented, to show that the true administration (or central management and control as Justice Woods described it) is centered in the lower-tax province.  These indicators may include the following:

  1. Where only a majority of the trustees are resident in the lower-tax province, they have the ability to outvote the non-resident trustee or act by majority alone on trustee decisions.  Where otherwise appropriate, this ability is exercised and documented.  Decisions taken only by the non-resident trustee and one of the resident trustees alone are avoided or kept to a minimum;
  2. The bank account for the trust is located in and operated from the lower-tax province;
  3. The T3 Tax and Information Returns for the trust are prepared in and forwarded to the Canada Revenue Agency from the lower-tax province.  Documentation is maintained to demonstrate this;
  4. Investment advice is received in the lower-tax province and investment decisions are made by or include the trustees resident in the lower-tax province.  If investment decisions are delegated, the lower-tax resident trustees actively select the delegate, receive the reporting by the delegate and periodically review the delegate’s performance;
  5. Trustee meetings are held in the lower-tax province.  The discussion of trust business includes the participation of the trustees resident in the lower-tax province and documentation of the active participation is maintained.
  6. Documentation reflects that the trustees resident in the lower-tax province play an active role in making the substantive decisions of the trust rather than just “rubber-stamping” the decisions of others;
  7. Adequate time and information is given for decision-making on significant issues required of the trustees resident in the lower-tax province;
  8. Decision-making by the trustees resident in the lower-tax province need not be pre-approved or vetted by others in another jurisdiction;
  9. It is clear that the lower-tax province trustees have been selected to act for appropriate reasons other than just their place of residence; and
  10. The choice of law selected for the trust is the same jurisdiction as the intended jurisdiction of the trust for tax purposes, unless there are compelling reasons to choose a different jurisdiction.

If you would like to know more about this case or its implications, please contact any member of Miller Thomson LLP’s Private Client Services Practice Group.


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