21 February 1992 Income Tax Severed Letter 9132105 - Residence 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.

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

Subject: RESIDENCE OF A TRUST (8192-1) Section(s): 104]

913210
Jim Wilson
(613)957-2123

XXX

Attention: XXX

February 21, 1992

Dear Sirs:

We are writing in reply to your letter dated November 8, 1991, concerning the residency of a trust for purposes of the Income Tax Act.

You have outlined the following hypothetical situation:

• 1. An estate is established pursuant to the terms of the Will of an individual who was not a resident of Canada at the time of his death. At the time of his death he owned assets in Canada, the United States and the United Kingdom ("U.K."). Income earned from the Canadian assets had been subject to Part XIII Tax and NR4 Supplementary slips were issued.
• 2. Three individuals were named as executors of the Will. Two of these individuals reside in the U.K. and the other in Canada. All three executors, pursuant to the terms of the Will, exercise equal management and control of the estate.
• 3. The Will did not declare that a separate trust was to be set up to hold the Canadian assets nor that the Canadian executor was to manage the Canadian assets and the U.K. executors the U.K. assets.

You have asked for our opinion with respect to the residence of such an estate for purposes of the Act.

The Department's views with respect to this issue are contained in Interpretation Bulletin IT-447, "Residence of a Trust or Estate" (hereinafter reference being made to "trust" and "trustee"). The residence of a trust is a question of fact to be determined according to the circumstances in each case. We do not have sufficient information to provide an opinion regarding the residence status of the above trust. Additional information required to make such a determination would include the following:

• 1. A copy of the Last Will and Testament.
• 2. Copies of any subsequent agreements pertaining to the management and control of the trust assets.
• 3. The location, description and approximate value of the trust assets.
• 4. The residence status of the trust beneficiaries.

Nevertheless, we are pleased to provide the following general comments based on the assumption that in fact only one trust exists.

A trust is generally considered to reside where the trustee or other legal representative who manages or controls the trust assets resides. Paragraph 2 of IT-447 outlines the powers or responsibilities which the Department considers in determining which trustee has management and control of the trust. However, as stated at paragraph 5 of IT-447 there may be some situations where the facts 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 of the residence of the trust regardless of any contrary provisions in the trust agreement.

In this regard a determination of each trustees' powers and responsibilities as established under the terms of the Will and any other related trust document would be imperative in the determination of the trust's residence. Subject to an analysis of all the facts, in the event all three of the trustees exercise equal portions of the defacto management and control of the hypothetical trust outlined above, then the Department's position as described in paragraph 3 of IT-447 will generally apply.

Notwithstanding the above comments regarding the residency of an estate given the above-noted assumptions, we would caution that because of the lack of jurisprudence on this issue, it is not clear what the decision of a court would be in any particular case. Some authorities in this area have argued that the courts could take the view that the residence of such a trust would be established by reference to where the trustees meet regularly and manage the affairs of the trust (as opposed to where the trustees reside) as this would resemble the test applicable to corporations where the directors reside in different places but customarily meet in one jurisdiction in order to manage the affairs of the corporation.

We would point out that the only significant Canadian tax case dealing with the issue of the residence of a trust is Thibodeau Family Trust v. The Queen [[1978] C.T.C. 539] (78 DTC 6376). In this case the Court held that a trust was resident of Bermuda and not Canada based upon the following "judicial formula":

• (1) the majority of the trustees were resident at all material times in Bermuda, and
• (2) the trust permitted a majority decision on all matters of trustees' discretion.

Furthermore, the trust property was at all material times in Bermuda and the non-resident trustees made all significant decisions with respect to investments of trust property.

The above comments are our interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 21 of Information Circular 70-8R2, it is not binding on this Department.

In the event you require a determination of the residence of the trust, forward all documentation to the International Taxation Office, Corporate and Trust Assessing Division, 2540 Lancaster Road, Ottawa, K1A 1A8, since that Division is responsible for making such determinations.

On the assumption the trust is in fact a resident of the U.K., Part XIII Tax would generally be applicable to most types of investment income arising in Canada and paid to the trust. The trust would also be subject to Part I Tax in respect of any business income earned in Canada as well as any taxable capital gains resulting from the disposition of taxable Canadian property. Such Part I or Part XIII Tax would be subject to any relief granted under the Canada-U.K. Income Tax Convention. In the event there is a Canadian beneficiary of the trust, generally all distributions made to him from the trust on account of income and not capital will be subject to Part I Tax.

We trust the forgoing is satisfactory.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch