2015-0610791C6 2015 CTF Q. 3 Provincial residency of a Trust

Principal Issues: What are the CRA's views regarding the application of the central management and control (CMC) test in establishing the residency of a trust for provincial income tax purposes in light of the decisions in Discovery Trust v. Canada and Boettger C. Agence du revenu du Québec?

Position: The CRA's views regarding the application of the CMC test in establishing the residence of trust has not changed in the light of these decisions.

Reasons: Case law on the CMC test supports that CMC encompasses the concept of high-level, strategic decision making.

Author: deLang-Lenters, Saskia
Section: 104(1), (2)

2015 CTF Annual Conference
CRA Roundtable

QUESTION 3:  Residency of a Trust for Provincial Income Tax Purposes

The central management and control test articulated by the Supreme Court of Canada (“SCC”) in Fundy Settlement v. Canada (“Fundy”) (endnote 1)  is determinative in establishing residency of a trust. There have been two recent cases involving the determination of the province of residence of a trust.

In Discovery Trust v. Canada (National Revenue) (endnote 2)  (“Discovery Trust”), the issue was whether beneficiaries and their advisers exercised central management and control such that the trust would be resident in Newfoundland, or whether the trustees exercised central management and control such that the trust would be resident in Alberta. In that case, the Supreme Court of Newfoundland and Labrador decided that the trust was resident in Alberta.

In Boettger c. Agence du revenu du Québec (endnote 3)  (“Boettger”) the issue was whether the trust was resident in Quebec or in Alberta. The Court of Québec (Civil Division) found that the Alberta trustee’s role was to passively hold the assets of the trust and follow the actions dictated by the professional advisors; accordingly, the Court determined that the trust was resident in Quebec.

Can the CRA provide its views regarding the application of the central management and control test in establishing the residency of a trust for provincial income tax purposes in light of these two decisions?

CRA Response

The CRA’s view regarding the application of the central management and control test in establishing the residence of a trust for provincial income tax purposes has not changed in light of the above decisions.  The following comments from the courts are indicative of how the test applies in a trust context.

In Garron Family Trust v. The Queen, Woods J. of the Tax Court of Canada concluded that management and control of both trusts was located in Canada because based on the evidence as a whole, the individuals who made the “substantive decisions respecting the trusts, either directly or indirectly through advisers that they directed”, were located in Canada. (endnote 4) 

At the Federal Court of Appeal (“FCA”), Sharlow J.A. provided the following guidance regarding the meaning of central management and control in a trust context: “By analogy from De Beers, supra, the task is to determine where a trust ‘keeps house and does business,’ i.e. where the power and discretion of the trustee are really being exercised.” (endnote 5)

The SCC affirmed the FCA decision and similarly cited De Beers, the landmark decision on corporate residence: “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.” (endnote 6) 

Case law on the meaning of the test in a corporate context supports that central management and control encompasses the concept of high-level, strategic decision making (endnote 7)  and governance rather than day to day functions such as practical business management. In our view, that fact that a trustee discharges their administrative and fiduciary obligations does not necessarily lead to the conclusion that the trustee exercises the level of substantive decision making that meets the central management and control test.

Determining the location in which the central management and control of a trust takes place continues to be a question of fact. Relevant factors may include, for example, whether the beneficial interests therein are closely held such as in a personal or family trust arrangement in which the beneficiaries or the settlor might be in a position to exercise management and control over the trust, or are widely held by members of the public such that the trustee does in fact have management and control over the trust. Paragraphs 1.5 and 1.6 of Income Tax Folio S6-F1-C1: Residence of a Trust or Estate provide additional guidance in respect of determining whether central management and control of the trust rests with someone other than the trustee.

2015-061079
Saskia deLang-Lenters
November 24, 2015

ENDNOTES

1  Fundy Settlement v. Canada (“Fundy”), (2012 SCC 14); affirming St. Michael Trust Corp. v. Minister of National Revenue, (“St. Michael’s”), (2010 FCA 309); affirming Garron Family Trust v. The Queen, (“Garron”), (2009 TCC 450)
2  Discovery Trust v. Canada (National Revenue), (2015 NLTD(G)86
3  Boettger c. Agence du revenu du Québec JL3793, 2015 QCCQ 7517
4  Garron, supra para. 252
5  St. Michael’s, supra para. 62
6  Fundy supra para. 15 citing De Beers Consolidated Mines, Ltd. V. Howe, [1906] A.C. 455 (H.L.), at para. 458
7  This description was used in a UK decision, Laerstate BV v HM Revenue & Customs [UKFTT 09 (TC).

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