Supreme Court Of Canada Decides On Trust Tax Residency

The Supreme Court of Canada dismissed the taxpayers' appeal in Fundy Settlement (also known as Garron or St. Michael Trust Corp.), deciding on April 12, 2012 that the relevant trusts were resident in Canada rather than Barbados for purposes of Canada's Income Tax Act. In reaching its decision the court applied long standing principles for determining residency of corporations, and held that a trust is resident where its central management and control is exercised.

Background

Two Canadian resident individuals, Garron and Dunin, were the principal shareholders of a Canadian operating company (PMPL). Following an "offshore freeze" transaction, the future increase in the value of PMPL accrued to shares of PMPL held by Canadian holding companies which in turn were held by trusts settled in Barbados. Garron and Dunin were each beneficiaries of their respective family trust, which had been settled for a nominal sum by a non-resident associate. The trustee of both trusts was St. Michael Trust Corp. (St. Michael), a licensed Barbados resident trust company with an office in Barbados. The Tax Court found that St. Michael only acted upon receiving instructions dictated by Garron and Dunin, and that its role was solely to act in an administrative capacity. The Canadian beneficiaries of the trust gave direct instructions to the investment advisers of the trusts. As part of an arm's length sale of PMPL, the trusts sold the shares of the Canadian holding companies, realizing capital gains of about $450 million.

The taxpayers argued that these capital gains were exempt from Canadian tax under Article XIV of the Canada-Barbados Tax Treaty (the Treaty) on the basis that the trusts were resident in Barbados (and not in Canada) for purposes of the Treaty. Specifically, the taxpayers argued that the residence of the trusts for purposes of the Income Tax Act (and consequently the Treaty) should not be in Canada since the trustee (St. Michael) was resident in Barbados. That position was supported by a prior decision of the Federal Court Trial Division (Thibodeau Family Trust) 1 and the prior administrative practice of the Canada Revenue Agency (CRA) which suggested that residence of a trust should generally be considered to be located where its trustee resides. 2

The CRA argued that the trusts should be considered resident in Canada, either on the basis of general principles or on the basis of a rule (section 94) that applies to deem certain non-resident trusts to be resident in Canada for certain Canadian tax purposes where the trust acquires property, directly or indirectly, from a...