SUPREME
COURT OF CANADA
Between:
St.
Michael Trust Corp., as Trustee of the Fundy Settlement
Appellant
and
Her
Majesty The Queen
Respondent
And
Between:
St.
Michael Trust Corp., as Trustee of the Summersby Settlement
Appellant
and
Her
Majesty The Queen
Respondent
Coram: LeBel, Deschamps, Fish, Abella, Rothstein, Moldaver and
Karakatsanis JJ.
|
Reasons
for Judgment:
(paras. 1 to 19)
|
The Court
|
Fundy Settlement v. Canada, 2012 SCC 14, [2012] 1
S.C.R. 520
St. Michael Trust Corp., as Trustee of
the Fundy
Settlement Appellant
v.
Her Majesty The
Queen Respondent
‑ and ‑
St. Michael Trust Corp., as Trustee of
the Summersby
Settlement Appellant
v.
Her Majesty The
Queen Respondent
Indexed as: Fundy Settlement v.
Canada
2012 SCC 14
File Nos.: 34056, 34057.
2012: March 13; 2012: April 12.
Present: LeBel, Deschamps, Fish, Abella, Rothstein, Moldaver and
Karakatsanis JJ.
on appeal from the federal court of appeal
Taxation — Income tax — Trusts —
Residence — Trusts held by corporation resident in Barbados — Beneficiaries of
trusts resident in Canada — Central management and control of trusts carried
out by main trust beneficiaries in Canada — Trustee seeking return of amounts
withheld on account of Canadian tax from capital gains realized by trusts on
sale of shares in Canada — Whether trusts are resident in Canada for taxation
purposes.
Held:
The appeals should be dismissed.
The principal basis for imposing
income tax in Canada is residency. As with corporations, the residence of a
trust should be determined by the principle that a trust resides for the
purposes of the Income Tax Act where its real business is carried on,
which is where the central management and control of the trust actually takes
place. The residence of the trust is not always that of the trustee. It will
be so where the trustee carries out the central management and control of the
trust where the trustee is resident. Here, however, the trusts are resident in
Canada, since the central management and control of the trusts was exercised by
the main beneficiaries in Canada and the trustee’s limited role was to provide
administrative services and it had little or no responsibility beyond that.
Cases Cited
Referred to: De Beers
Consolidated Mines, Ltd. v. Howe, [1906] A.C. 455; The King v. British
Columbia Electric Railway Co., [1945] C.T.C. 162; Crossley
Carpets (Canada) Ltd. v. M.N.R. (1967), 67 D.T.C. 522; Unit Construction
Co. v. Bullock, [1960] A.C. 351.
Statutes and Regulations Cited
Canada-Barbados Income Tax Agreement Act, 1980, S.C. 1980‑81‑82-83, c. 44, s. 25.
Income Tax Act, R.S.C. 1985, c. 1
(5th Supp .), ss. 2(1) , 94 , 104(1) , (2) , 245 .
Treaties and Other International
Instruments
Agreement Between Canada and Barbados for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
and on Capital, Can. T.S. 1980 No. 29.
Authors Cited
Krishna, Vern. The Fundamentals of Income Tax Law. Toronto:
Carswell, 2009.
APPEALS from a judgment of the
Federal Court of Appeal (Nadon, Sharlow and Stratas JJ.A.), 2010 FCA 309, 411
N.R. 125, [2011] 2 C.T.C. 7, 2010 D.T.C. 5189, 61 E.T.R. (3d) 168, [2010]
F.C.J. No. 1457 (QL), 2010 CarswellNat 4259 (sub nom. St. Michael Trust
Corp. v. Minister of National Revenue; Garron Family Trust v. The Queen),
affirming a decision of Woods J., 2009 TCC 450, [2010] 2 C.T.C. 2346, 2009
D.T.C. 1287, 50 E.T.R. (3d) 241, [2009] T.C.J. No. 345 (QL), 2009
CarswellNat 2600 (sub nom. Garron Family Trust v. The Queen). Appeals dismissed.
Douglas H.
Mathew, Matthew G. Williams and Mark A.
Barbour, for the appellants.
Anne M.
Turley and Daniel
Bourgeois, for the respondent.
The following is the judgment
delivered by
[1]
The Court — St. Michael Trust Corp. (“St. Michael”) is the trustee of two
trusts, the Fundy Settlement and the Summersby Settlement. The trusts were
settled by an individual resident in St. Vincent in the Caribbean. The
beneficiaries are residents of Canada. St. Michael is a corporation resident
in Barbados.
[2]
When the trusts disposed of shares they owned in
two Ontario corporations, the purchaser remitted some $152 million to the
Minister of National Revenue as withholding tax on account of Canadian tax from
capital gains realized by the trusts on the sale of the shares.
[3]
St. Michael sought return of the withheld amount
based on an exemption from Canadian capital gains tax under the Agreement Between Canada and Barbados for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and on Capital, Can. T.S. 1980 No. 29 (incorporated into Canadian
law by the Canada-Barbados Income Tax Agreement Act, 1980, S.C.
1980-81-82-83, c. 44, s. 25). Under the treaty, tax
would only be payable in the country in which the seller was resident. St.
Michael claimed that because it was resident in Barbados, the trusts were
resident in Barbados. As a result, there would be no basis for withholding tax
in Canada.
[4]
The Minister of National Revenue was of the
opinion that the trusts were resident in Canada and that the withheld tax was
properly payable.
[5]
St. Michael’s appeal from the Minister’s
reassessment to the Tax Court of Canada was unsuccessful (2009 TCC 450, [2010]
2 C.T.C. 2346), as was its further appeal to the Federal Court of Appeal (2010
FCA 309, 411 N.R. 125). It was granted leave to appeal to this Court.
[6]
The issue in this case is the residence of the Fundy
and Summersby trusts. St. Michael says the residence of the trusts is the
residence of the trustee, which is Barbados. The Minister says the trusts are
resident in Canada because the central management and control of the trusts was
carried out by the main beneficiaries, who were resident in Canada. On the
facts as determined by Woods J., the Tax Court judge, St. Michael is resident
in Barbados while the central management and control of the trusts was carried
out in Canada by the main beneficiaries of the trusts.
[7]
As Sharlow J.A. in the Federal Court of Appeal
explained, the principal basis for imposing income tax in Canada is residency
(para. 52). Professor V.
Krishna in The Fundamentals of Income Tax Law (2009), noted, at p. 85,
that the policy reason for this is to ensure that a person who enjoys the
legal, political and economic benefits of associating with Canada will pay
their appropriate share for the costs of this association. For an individual, factors such as nationality, physical presence,
location of family home and social connections, among others, will be
considered in determining residence. While the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp .) (the “Act ”), contains certain deeming rules with respect
to residency, generally residence is a question of fact.
[8]
While there is a dearth of judicial authority on
the question of the residency of a trust, the residency of a corporation has
been determined to be where its central management and control actually
abides. In De Beers Consolidated Mines, Ltd. v. Howe, [1906] A.C. 455
(H.L.), Lord Loreburn stated, at p. 458:
In
applying the conception of residence to a company, we ought, I think, to
proceed as nearly as we can upon the analogy of an individual. A company
cannot eat or sleep, but it can keep house and do business. We ought,
therefore, to see where it really keeps house and does business. . . .
[A] company resides for purposes of income tax where its real business is
carried on. . . . I regard that as the true rule, and the real
business is carried on where the central management and control actually
abides.
The central management
and control test for residency of a corporation has been adopted in Canada in a
number of cases and is well established (see The King v. British Columbia
Electric Railway Co., [1945] C.T.C. 162 (Ex. Ct.); Crossley
Carpets (Canada) Ltd. v. M.N.R. (1967), 67 D.T.C. 522 (T.A.B.)).
[9]
In general, the central management and control
of a corporation will be exercised where its board of directors exercises its
responsibilities. However, as Sharlow J.A. pointed out (at para. 56), where
the facts are that the central management and control is exercised by a
shareholder who is resident and making decisions in another country, the
corporation will be found to be resident where the shareholder resides. (See Unit
Construction Co. v. Bullock, [1960] A.C. 351 (H.L.).)
[10]
St. Michael says that the residence of the trust
must be the residence of the trustee based on two fundamental propositions.
First, the trust is not a person like a corporation, so the central management
and control test is inapplicable to trusts. Sharlow J.A. disposed of St.
Michael’s first argument summarily, as do we. While a trust is not a person at
common law, it is deemed to be an individual under the Act . Section
104(2) provides:
A trust shall, for the purposes of
this Act , and without affecting the liability of the trustee or legal
representative for that person’s own income tax, be deemed to be in respect
of the trust property an individual . . . .
We agree with the Minister
that the fact that at common law a trust does not have an independent legal
existence is irrelevant for the purposes of the Act .
[11]
St. Michael’s second argument is that the Act
links a trust to the trustee and therefore the residence of the trust must be the
residence of the trustee. It bases this argument on s. 104(1) , which provides:
In this Act , a reference to a trust
or estate . . . shall, unless the context otherwise requires, be read to
include a reference to the trustee, executor, administrator, liquidator of a
succession, heir or other legal representative having ownership or control of
the trust property . . . .
The Federal Court of
Appeal found that the linkage in s. 104(1) was for the purposes of solving “the
practical problems of tax administration that would necessarily arise when it
was determined that trusts were to be taxed despite the absence of legal
personality” (para. 64). However, this did not mean that in all cases, the
residence of the trust must be the residence of the trustee.
[12]
St. Michael argues that s. 104(1) links the
trustee to the trust for all attributes of a trust, including residency.
However, although the subsection provides that a reference to a trust in the
Act shall be read to include a reference to a trustee, St. Michael points to no
provision that would link the trust and the trustee for purposes of determining
the residency of the trust. The link that St. Michael asserts is not a
principle of general application to trusts for all purposes, and there is
nothing in the context of s. 104(1) that would suggest that there be a legal
rule requiring that the residence of a trust must be the residence of the
trustee.
[13]
On the contrary, s. 2(1) is the basic charging
provision of the Act, and its reference to a “person” must be read as a
reference to the taxpayer whose taxable income is being subjected to income
tax. This is the trust, not the trustee. This follows from s. 104(2),
which separates the trust from the trustee in respect of trust property.
[14]
On the other hand, there are many similarities
between a trust and corporation that would, in our view, justify application of
the central management and control test in determining the residence of a
trust, just as it is used in determining the residence of a corporation. Some
of these similarities include:
(1) Both
hold assets that are required to be managed;
(2) Both
involve the acquisition and disposition of assets;
(3) Both
may require the management of a business;
(4) Both
require banking and financial arrangements;
(5) Both
may require the instruction or advice of lawyers, accountants and other
advisors; and
(6) Both
may distribute income, corporations by way of dividends and trusts by
distributions.
As
Woods J. noted: “The function of each is, at a basic level, the management of
property” (para. 159).
[15]
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 trusts 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.
[16]
We agree with Woods J. that adopting a similar
test for trusts and corporations promotes “the important principles of
consistency, predictability and fairness in the application of tax law” (para.
160). As she noted, if there were to be a totally different test for trusts
than for corporations, there should be good reasons for it. No such reasons
were offered here.
[17]
For these reasons, we would dismiss the appeals
with costs.
[18]
In the alternative, the Minister argued that the
trusts are deemed residents of Canada under s. 94, which provides a scheme for
taxing non-resident trusts. Even if the trusts were found not to be resident
in Canada under common law principles, the Minister submitted that their
assessments were justified under s. 94 because the trusts were deemed to be
Canadian residents for the purposes of the Act , and therefore Canadian
residents for the purposes of the treaty exemption. In the case that this
alternative argument failed, the Minister further argued that the tax benefit
should be denied according to the general anti-avoidance rule under s. 245 of
the Act because it would frustrate the purpose of relevant parts of the treaty.
[19]
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.
Appeals dismissed with costs.
Solicitors for the
appellants: Thorsteinssons, Toronto.
Solicitor
for the respondent: Attorney General of Canada, Ottawa.
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