Supreme Court of Canada Considers Trust Residence


The Canadian government taxes individuals, corporations and trusts on their worldwide income if they are considered to be resident in Canada. For individuals, factors such as nationality, physical presence, and social and economic ties, among others, are considered in determining residence. For corporations, residence is generally determined based on where the central management and control of the corporation is exercised.  For trusts, Canadian courts have long held that the residence of a trust for tax purposes was determined by the residence of the trustee who managed the trust or controlled the trust assets.  However, the recent decision of the Supreme Court of Canada in Fundy Settlement v. Canada (referred to in the lower courts as Garron) confirmed that trustee residence is not the appropriate test for determining the residence of a trust.

In the Fundy case, two trusts were settled in Barbados and held shares in Canadian holding companies. The shares were eventually sold and the trusts earned a substantial profit from the sale transactions. The trustee of the trusts, a corporation resident in Barbados, argued that the trusts were residents of Barbados and therefore not subject to capital gains tax in Canada. The Tax Court, the Federal Court and now the Supreme Court of Canada, all disagreed and found that the residence of a trust for tax purposes is to be determined by applying a “central management and control test” similar to that applied in determining the residence of a corporation. Since the Canadian resident beneficiaries were found to be responsible for most of the decision-making, and the trustee was found to have played a more administrative role, it was determined that the central management and control was exercised in Canada, and the trusts were resident in Canada.

The Fundy decision will make determining the residence of a trust more of a fact-driven exercise. As long as the trustee exercises its discretion under the trust indenture, is responsible for managing the affairs of the trust, and does this within its jurisdiction of residence, the residence of the trust will continue to be  the same as the residence of the trustee. However, in cases where beneficiaries, protectors or others who may influence the trust are located in a jurisdiction different than that of the trustee, they will need to consider how their involvement impacts the central management and control of the trust to the point of changing the residence of the trust.