Historically, residency of a trust has been of interest mainly to multi-nationals and to wealthy individuals looking to shelter assets off-shore. However, the world is getting smaller and now many Canadian businesses have substantial international interests. It is also very common for families to have children, parents or siblings living in other countries and continents, and the question of trust residency more readily arises in commonplace family circumstances. For example, parents may wish to set up trusts in their wills to benefit a child who has moved to the United States. Since the trust assets will be Canadian based, it is more than likely that Canadian law applicable to trusts resident in Canada will govern.
Knowing the residency of the trust is essential to understanding the extent to which these trusts will be taxed by Canadian or other jurisdictions, and will determine the applicability of important Canadian tax provisions such as those which permit a deferral of income tax in certain asset and share transfers if the parties to the transaction are resident in Canada.
For tax purposes, a trust used to be considered resident where the trustee (or the majority of the trustees, if more than one) was resident.
In 2012, the Supreme Court of Canada in Fundy Settlement v Canada (also known as Garron Family Trust) turned this longstanding approach on its head, affirming the decision of the Federal Court of Appeal in that case. Now, following the Supreme Court’s decision in Garron, trusts are deemed to be resident where the central management and control of the trust actually takes place – regardless of where the trustees reside. Stated otherwise, the trust is deemed to be resident where “its real business is carried on”.
In Garron, the trustee of the trust in question was a corporation resident in Barbados. However, the trust decisions were being made by the beneficiaries of the trust, who were resident in Canada. Even though the trustee was resident in Barbados, the Supreme Court agreed that the trust was resident in Canada where the real decisions were being made.
The Supreme Court noted that the residence of a corporation is well settled law; the “residency of a corporation has been determined to be where its central management and control actually abides.” Although a trust, unlike a corporation, is not a “person” at common law, the Supreme Court held that there are many similarities between trusts and corporations justifying application of the central management and control test to determining the residence of a trust, just as it is used in determining the residence of a corporation. Additionally, adopting similar tests for trusts and corporations promotes consistency, predictability and fairness in the application of tax law. As such, the Court concluded that:
“[a]s with corporations, residence of a trust should be determined by the principle that a trust resides for the purposes of the [Income Tax] Act where its real business is carried on […], which is where the central management and control of the trust actually takes place.”
This crucial change to the determination of the residency of trusts means that trust decisions should be made in the jurisdiction in which the trustees wish the trust to be resident. Canadians and Canadian businesses looking to shelter income from tax in Canada will find it even more difficult to do so unless they are willing to surrender control and influence over the trust’s assets, a risky proposition at best.
In the common situation described in the first paragraph above, the Canadian residency of the trust cannot be assumed if the non-resident child is to have a significant role in how trust decisions are made.
More generally, families with members living outside Canada need to be mindful in their estate planning with respect to the appointment of non-resident children as estate trustees in their wills, or even the extent to which non-resident children are involved in significant estate decisions. These are important concerns with costly tax implications if it goes wrong, but good professional advice will ensure that the intended tax consequences are achieved.
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