30 October 2012 Ontario CTF Roundtable Q. 8, 2012-0462841C6 - Ontario CTF – Q8 Residency of a Trust

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Impact on the CRA published position in relation to the factors it considers indicative for purposes of establishing residency of a trust in light of the 2012 SCC decision in St. Michael Trust Corp.

Position: Residence of a trust is a question of fact to be determined according to the circumstances of each case - the SCC decision affirmed the CRA view that the residence of the trustee does not always determine the residence of the trust.

Reasons: Comments as previously published by the Directorate at the Prairie conference and the BC conference

Ontario Tax Conference
October 30, 2012

Question 8 – Residency of a Trust for Tax Purposes

(a) CRA's long-standing position on the determination of the residency of a trust for tax purposes is described in IT-447 Residence of a Trust or Estate (published in 1980). In the bulletin, CRA has stated their view that the residence of the person making the important decisions affecting the management and control of the trust property is the most relevant factor in determining the residence of the trust or estate.

The bulletin continues by stating that important decisions being made by the person would include the following:

a. Control over changes in the trust's investment portfolio;
b. Responsibility for the management of any business or property owned by the trust;
c. Responsibility for any banking and financing arrangements for the trust;
d. Control over any other trust assets;
e. Ultimate responsibility for preparation of the trust accounts and reporting to the beneficiaries of the trust; and
f. Power to contract and deal with trust advisors (e.g. auditors and lawyers).

Pursuant to the 2012 Supreme Court of Canada ("SCC") decision against St. Michael Trust Corp in Fundy Settlement v. Her Majesty the Queen, 2012 SCC 14, does CRA intend on updating its published position on the factors it considers indicative for purposes of establishing the residency of a trust for federal and provincial income tax purposes?

(b) In its unanimous decision on April 12, 2012 in Fundy Settlement v. Her Majesty the Queen, 2012 SCC 14, the SCC found that the correct legal test for determining residence of a trust is the same test that is applied to corporations. May we have your comments on the SCC decision?

CRA Response

(a) As highlighted in our recent response to this same question at the 2012 British Columbia Tax Conference, the long-standing position of the Canada Revenue Agency ("CRA") on the determination of the residence of a trust in Canada, or in a particular province or territory within Canada, is set out in Interpretation Bulletin IT-447, Residence of a Trust or Estate, dated May 30, 1980. Paragraph 5 of IT-447 says:

Normally, residence of a trust is dependent upon residence of the trustee or trustees who can exercise management and control of the trust. In some situations, the facts may indicate that a substantial portion of the management and control rests with some other person such as the settlor or the beneficiaries. In these situations, the residence of this other person may be considered to be the determining factor for the trust, regardless of any contrary provisions in the trust agreement.

In our view, the SCC has affirmed the CRA's position that the residence of the trustee does not always determine the residence of the trust, and has clarified that the trust will be resident where the central management and control of the trust actually takes place.

At the 2011 Canadian Tax Foundation annual conference, the CRA announced the launch of the new Income Tax Folio product to replace the existing Interpretation Bulletins. Each Folio will be published on an "as completed basis", and the related IT Bulletin will be cancelled. To date, officials from numerous areas within the CRA as well as members of tax professionals' organizations in the private sector have been consulted, allowing for the identification and prioritization of IT Bulletins that need to be reviewed and updated.

The CRA has identified IT-447 as one of the IT Bulletins to be reviewed and replaced in the early phases of the Folio initiative. In the course of this review, the CRA will consider whether any of the information in IT-447 (including its published position on the factors it considers indicative for purposes of establishing the residency of a trust for federal and provincial income tax purposes) will need to be updated as a result of the SCC decision. Further details in this regard will be made available as the Folio initiative progresses.

(b) As stated in our response to Part (a) above and as we highlighted at the 2012 Prairie Provinces Tax Conference earlier this year, we are of the view that, in its decision in Fundy Settlement, the SCC has affirmed the CRA's position that the residence of the trustee does not always determine the residence of the trust, and has clarified that the trust will be resident where the central management and control of the trust actually takes place.

Specifically, at paragraph 15 of the decision, the SCC says the following:

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" (De Beers, at p. 458), which is where the central management and control of the trust actually takes place. As indicated, the Tax Court judge found as a fact that the main beneficiaries exercised the central management and control of the trusts in Canada. She found that St. Michael had only a limited role "to provide administrative services" and little or no responsibility beyond that (paras. 189-90). Therefore, on this test, the trust must be found to be resident in Canada. This is not to say that the residence of a trust can never be the residence of the trustee. The residence of the trustee will also be the residence of the trust where the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident. These, however, were not the facts in this case.

In paragraph 18 of its decision, the SCC described two alternative arguments made by the Minister in the event that the SCC found the trusts not to be resident in Canada under common law principles. The Minister argued that the trusts were deemed residents of Canada under section 94 of the Income Tax Act (the "Act"), and would be resident in Canada for the purposes of the Canada-Barbados Tax Agreement (the "Treaty"). As a second alternative argument, the Minister further argued that the tax benefit should be denied under section 245 of the Act because it would frustrate the purpose of the relevant parts of the Treaty.

In paragraph 19, the SCC says:

Given our conclusion that the trusts are resident in Canada under common law principles, it is not necessary to consider the arguments made about s. 94 or s. 245 of the Act. We should not be understood as endorsing the reasons of the Federal Court of Appeal on those matters.

In light of the SCC's comments, the CRA maintains its position with regard to these issues. However, we note that on August 27, 2010, draft legislation was released that proposes to amend the non-resident trust rules (footnote 1) for taxation years that end after 2006 (with possible earlier application, if elected). Included in the draft legislation is a proposed amendment to section 4.3 of the Income Tax Conventions Interpretation Act, applicable after March 4, 2010. Further, a Protocol to the Treaty was signed on November 8, 2011, but is not yet in force. These amendments will have to be considered in any analysis going forward.

Kim Duval
File 2012-046284
October 30, 2012

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Notice of Ways and Means Motion in this regard was released by the Department of Finance on October 24, 2012