On October 14, 2016, the Ontario Superior Court of Justice concluded that the two trusts in The Herman Grad 2000 Family Trust (2016 ONSC 2402) and The Marya Grad Spousal Trust (2016 ONSC 2407)—which filed for income tax purposes as Alberta-resident trusts—were in fact resident in Ontario and not Alberta for their 2006 to 2009 taxation years. The Ontario minister said that the trusts were residents of Ontario and thus subject to Ontario provincial income tax. Alberta's income tax rate at the time in issue was lower than Ontario's, and the family trust was liable to pay $4.7 million more in income tax as an Ontario resident than it would have paid as an Alberta resident. The spousal trust was liable to pay $2.8 million more in income tax as an Ontario resident.
Herman Grad is a resident of Ontario and was an Ontario resident when the trusts were settled in 2000, in Ontario, by a silver coin from the family accountant. The initial trustees were all individuals resident in Ontario. In January 2006, the family trust deed was amended to give the trustees the power to "delegate management and authority to discretionary managers of investment funds as the Trustees determine appropriate," and it specified that "such delegation does not require the Trustees to implement a written plan or strategy as contemplated by the Trustee Act." In September 2016, the deed was further amended to give Grad the power to remove and replace the trustees of the family trust at any time, for any reason he deemed sufficient.
On September 15, 2006, the initial trustees resigned; on the same day, Sian Matthews and John C. Armstrong, lawyers with Bennett Jones LLP in Calgary, were appointed by Grad as the new trustees of the family trust. At all relevant times, Matthews and Armstrong were residents of Alberta.
Grad settled the spousal trust in 2006, and he was the protector of the trust, too. The deed to the spousal trust provided that the protector was entitled at any time to remove any trustee, upon giving the trustee notice in writing, for any reason he deemed sufficient. Matthews and Armstrong were the trustees not only of the family trust but of the spousal trust.
The court relied on the SCC decision in Fundy Settlement (2012 SCC 14), which affirmed the FCA decision in St. Michael Trust Corp. (2010 FCA 309) that courts should "undertake a fact driven analysis with a view to determining the place where the central management and control of the trust is actually exercised." The ONSC said in Herman Grad:
This analysis requires the Court to examine who, in reality, exercised the powers and discretions vested in the trustee by the trust deed and where that person resides. The relevant powers and discretions are those regarding the management and control of the trust property, as opposed to more incidental, administrative decisions. If it is established that management and control over the trust property is, in fact, exercised by someone other than the trustee, the trust will be resident where the actual decision-maker resides.
Tax practitioners are familiar with these principles. However, these decisions demonstrate how difficult it can be to ensure that decision-making powers stay out of the hands of a wealth creator who is reluctant to give up control. On the facts, the trust planners carefully selected two lawyers to act as trustees. And yet the plan fell apart, because the complicated and somewhat tortuous facts—the decision is 46 pages long, most of it devoted to a dissection of the facts—show that Grad continued to exercise control of the trust. For example, when one of his daughters sought more information about the family trust, the trustees were immediately cautioned by the Grad group's chief financial officer (CFO) not to divulge that information to any of Grad's children. The trustees said that they called Grad to inform him that they could not comply with the request. However, one trustee said that she "had to walk a fine line between discharging her responsibilities as a trustee and wanting to satisfy Grad": she authorized the CFO to release information on the trust and its assets to the daughter.
Originally published in Canadian Tax Highlights, December 2016.
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