Individuals and families whose tax plans include trusts should
take note of the recent decision of the Supreme Court of
Newfoundland and Labrador in Discovery Trust v Minister of
National Revenue ("Discovery
Trust")1 – the first case to deal
with the issue of the residency of a trust for provincial tax
purposes following the Supreme Court of Canada's decision on
trust residency in Fundy Settlement.2 It is
significant for confirming that the "central management and
control" test set out in Fundy Settlement also
applies in the domestic context to ascertain the provincial
residency of a trust. It also establishes some guiding principles
relevant to taxpayers in determining where a trust is resident for
provincial tax purposes.
Trusts are deemed to be individuals for the purposes of income tax
in Canada, and the taxable income of a trust is subject to both
federal and provincial taxes. The taxation statutes, however, are
silent on how to determine the residency of a trust. An earlier
decision of the Federal Court was widely accepted as establishing
that a trust is resident where its trustee is resident.3
Many taxpayers relied on the tax planning opportunities generated
by this decision to establish off-shore trusts. This understanding
came due for a revision, however, in light of the Supreme Court of
Canada's decision in Fundy Settlement that the
residency of a trust in the cross-border context was where its
central management and control abided.
Discovery Trust centered on a tax plan designed to allow a
trust, most of whose beneficiaries were resident in one province,
to take advantage of lower tax rates in effect in another province.
The Discovery Trust (the "Trust") was
settled by the founder of CHC Helicopter Corporation, Craig L.
Dobbin, for the benefit of the Dobbin children, most of whom
resided in Newfoundland and Labrador. The Dobbin children were
initially made trustees of the Trust, but shortly before the death
of the settlor, they resigned and the Alberta office of Royal Trust
Corporation of Canada ("Royal Trust")
was appointed as successor trustee. At the same time, the assets of
the Trust were moved to Alberta (which had more favourable tax
rates than Newfoundland and Labrador) and the laws governing the
trust were changed to those of Alberta.
The Minister of National Revenue (the
"Minister") reassessed the taxpayer on
the basis that the Trust was resident not in Alberta, but in
Newfoundland and Labrador. Pointing to a number of transactions
involving property of the Trust, the Crown argued that the Dobbin
children, as beneficiaries, either directly or indirectly made all
the decisions concerning the management and control of the Trust
and that Royal Trust, as new trustee, was merely responsible for
administrative tasks. The Crown argued that, since the central
control and management of the trust was in Newfoundland and
Labrador, it was a resident of that province and thus subject to
that province's income tax regime. If the Trust was resident in
Alberta, it would save about $9 million in tax.
The Court confirmed that central management and control is the test
for residency for provincial tax purposes. The Court reviewed each
of the transactions at issue to determine where central management
and control was exercised. The Court found that no substantial
decisions were made by the beneficiaries such that control could be
said to have been delegated to them. In reaching this conclusion,
the Court provided some important guidance about the administration
of trusts that individuals should keep in mind when engaging in tax
planning:
- First, the Court found that, absent action taken under a statutory anti-avoidance provision, it is inappropriate for the Minister to reassess on the basis of a taxpayer's motivation to arrange affairs in a manner designed to minimize taxes payable. This is consistent with existing jurisprudence and long-standing principles of Canadian tax law. Case law also confirms the Minister's general obligation to refrain from recharacterizing a bona fide legal relationship on the basis that another transaction structure would have resulted in the payment of more taxes.
- Second, where a trustee is required to approve a transaction in respect of trust property (e.g., as shareholder of shares held in trust), trustee actions that may appear routine and passive do not necessarily indicate an abdication of control and management by the trustee. Reviewing the details of the proposed transaction, acquiring explanations sufficient to make an informed decision, reviewing the trust's governing documents to ensure that the proposed approval is within the trustee's authority, and properly considering the consequences of the transaction for the beneficiaries generally are within the powers of a trustee.
- Third, a difference of opinion between trustee and beneficiaries can exist and a trustee can acquiesce to the demands of a beneficiary without giving up its authority over trust property. For example, in Discovery Trust, Royal Trust withheld, at the beneficiaries' request, a lower amount in respect of a tax liability than it had originally planned; the Court found that this did not result in an abdication of its control. Consultation by a trustee with beneficiaries should not, on its own, be seen as a delegation of control to them.
From a practical perspective, this case serves as a reminder
that decisions in respect of trust property should be made pursuant
to proper governance procedures. Negotiations and disagreements
with, and even acquiescence to requests of, beneficiaries need not
jeopardize a trustee's control over a trust's affairs so
long as the trustee is actively engaged, retains the true
decision-making ability, is properly motivated, has independent
authority, and is not functioning as a mere nominee. Similarly, a
trustee should have the ability to gather information about
proposed transactions in respect of trust property without being
seen as abdicating its authority. Furthermore, a trust generally
may be administered in a manner designed to minimize taxes payable,
subject to legislation (including the general anti-avoidance rule
in the Income Tax Act (Canada).
Taxpayers employing provincial tax planning strategies similar to the one employed in Discovery Trust should carefully review their decision-making procedures and trust documentation and ensure that central management and control factually abides in the province where the trust is intended to reside. In the meantime, more cases have been, and likely will be, heard in respect of trust residency.4
Footnotes
1 Discovery Trust v Minister of National Revenue, 2015 NTLD(G) 86.
2 Fundy Settlement v Canada, 2012 SCC 14. The decision is alternatively known as Garron Family Trust v R and St Michael Trust Corp v R.
3 Thibodeau Family Trust v Canada, [1978] FCJ No. 607 (FCTD).
4 See, e.g., Boettger c. Agence du revenu du Québec, 2015 QCCQ 7517 - another recent decision dealing with the provincial residency of a trust.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2015
