Trust Residency - 'Central Management and Control'

The Federal Court of Appeal (FCA) recently1 confirmed that, in determining trust residence for purposes of the Income Tax Act (Canada) (Act), the established common law test for corporate residency should be applied such that a trust is resident in the country where its central management and control (CMC) is exercised. The FCA confirmed the lower court's rejection of the view commonly expressed in the tax community that the residence of a trust is determined solely by reference to the residence of the trustee.2

The facts in the Garron case are outlined in our discussion of the Tax Court of Canada decision in International Tax Update. The issue before the court was whether two trusts established under the laws of St. Vincent were subject to Canadian tax on gains from the disposition of certain property. Both trusts had a corporate trustee that was incorporated, licensed and resident in Barbados, as well as beneficiaries that were Canadian residents. The trusts disposed of shares of Canadian holding corporations that owned shares of PMPL Holdings Inc., realizing substantial capital gains. For non-residents of Canada, the holding company shares were "taxable Canadian property" under the Act such that the gains on their disposition would be subject to Canadian income tax. However, Article XIV(4) of the Canada-Barbados Income Tax Agreement (1980) (Treaty) provided an exemption from Canadian income taxation on such gains for persons who were Barbados residents for purposes of the Treaty.

The key issue in the appeal was whether the trusts were resident in Canada under common law principles. If they were not, the further alternative issues were (i) whether they were deemed to be resident in Canada by virtue of Section 94 of the Act (such that the trusts would be subject to tax under Part I of the Act); (ii) if they were so deemed, whether the Treaty would override the provisions of the Act imposing tax as a consequence of such deemed Canadian residence; and (iii) whether the general anti-avoidance rule (GAAR) applied, on the basis that there would be an abuse of the Treaty if the trusts were able to claim relief from Canadian taxation under Article XIV(4).

Common Law Residency Test

There is very little jurisprudence that considers the determination of residence for tax purposes, and the limited case law that exists was not — at least in the eyes of the Tax Court judge — dispositive. This is why she felt the need to look at the legal residency tests in other contexts to help determine the residence of the trusts in this case.

The FCA began its analysis by stating that the residence of any person is a question of fact, the determination of which requires consideration of factors that point to, or away from, an economic or social link between the person and the particular country. Specific legal principles for determining residence may apply in certain circumstances, but those specific rules do not eliminate the need to consider all the relevant facts.

In the case of an individual, the relevant factors to consider in determining residency include nationality, physical presence, location of business or the family home, mode of family...