On April 12, 2012, the Supreme Court of Canada (SCC) released its unanimous decision in St. Michael Trust Corp. v. The Queen (referred to generally as the Garron Family Trust case) involving the residency of a trust for purposes of the Income Tax Act (Canada) (the Act). The SCC upheld the decisions of the lower courts that central management and control over the trust property, rather than the residence of the trustees, was the appropriate test for determining trust residence for purposes of the Act.
The income tax result of this case was that capital gains thought by the taxpayers to be exempt from Canadian income tax due to the Barbadian residency of the trusts, were ultimately found to be subject to income tax in Canada. However the more far reaching implication, and why this case is so significant, is that it clarifies the principles to be applied in determining the residency of a trust while potentially providing further guidance where residency of a corporation may be an issue.
In this case, a Barbados corporation was the trustee of two trusts, the beneficiaries of which were resident in Canada. The SCC stated that, 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," which is where the central management and control of the trust actually takes place. As a result, a trust is not necessarily resident where its trustees are resident. The SCC found that, in this case, the main beneficiaries exercised the central management and control of the trusts in Canada and the trustee had only a limited role of providing administrative services and had little or no responsibility beyond that function. Therefore, on this test, the SCC concluded that the trusts must be found to be resident in Canada.
The SCC agreed with the lower courts and found that there were sufficient similarities between a trust and a corporation to justify the 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. Certain commonalities include:
- Both hold assets that are required to be managed;
- Both involve the acquisition and disposition of assets;
- Both may require the management of a business;
- Both require banking and financial arrangements;
- Both may require the instruction or advice of lawyers, accountants and other advisors; and
- Both may distribute income, corporations by way of dividends and trusts by way of distributions.
The SCC also agreed with the lower court judge that adopting a similar test for trusts and corporations promotes "the important principles of consistency, predictability and fairness in the application of tax law."
The SCC did not rule out that a trust could be found resident where its trustee resides. In order for the residence of the trust to be based on the residence of the trustee, the trustee must carry out the central management and control of the trust and these duties must be performed where the trustee is resident.
What this all means for taxpayers who are Canadian resident beneficiaries of trusts is that they must examine their understanding of the trust's residency, be it provincially or out of country, to determine whether the results of the SCC decision impact their current structures.
Gina Pak, CA is a Tax Manager in the Toronto office at Collins Barrow.
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