Canada: Federal Court of Appeal Affirms Central Management & Control Test for Trust Residency

On November 17, 2010, the Federal Court of Appeal affirmed the landmark decision of the Tax Court of Canada in Garron and Garron, Trustees of the Garron Family Trust v. The Queen (reported as St. Michael Trust Corp.) and thereby ushered in new law on the question of trust residency. The Tax Court had held that the residency of a trust is based upon the central management and control test. 


Garron involved a determination of the residency of two trusts formed in Barbados (the "Barbados Trusts"). The Barbados Trusts were settled in the context of a corporate reorganization to own the shares of two Canadian holding companies which in turn held the growth (common) shares of a Canadian corporation.  Frozen preferred shares of the Canadian corporation were owned by two other Canadian corporations whose shares were owned by the beneficiaries of the Barbados Trusts.  The preferred shares had a fixed value of $50 million with a price adjustment clause. 

In 2000, the shares of the two Canadian holding companies were sold by the Barbados Trusts for a substantial capital gain. Twenty-five per cent tax was paid by the Barbados Trusts and section 116 certificates were obtained. The Barbados Trusts subsequently filed Canadian tax returns claiming a refund of the Canadian tax on the basis that the gains were exempt from Canadian tax under Article XIV of the Barbados-Canada Income Tax Convention (the "Treaty"). The Minister of National Revenue denied the refund applications on the basis that the Barbados Trusts were resident in Canada.

Tax Court Decision

The Tax Court dismissed the appeals on the basis that the Barbados Trusts were resident in Canada and therefore not entitled to any exemption from Canadian tax under the Treaty. The Court rejected the proposition that the residence of the trustee is always the deciding factor in determining the residence of a trust, instead finding that the central management and control test, which is the established test for determining the residency of a corporation, should also apply to a trust.

Federal Court of Appeal Decision

In a detailed judgment, the Federal Court of Appeal dismissed the taxpayers' appeal and confirmed the central management and control test as the appropriate test for determining the residence of a trust. In its decision, the Court noted that a rigid legal test that ties the residence of a trust to the residence of its trustees, regardless of the facts, denies the central theme of jurisprudence on the determination of residence for tax purposes, which is that residence is fundamentally a question of fact. The Court concluded that the determination of residence for tax purposes should be a fact-driven analysis with a view to determining where the central management and control of the trust is actually exercised. While the residence of a trustee may be sufficient in many cases to determine the residence of a trust (i.e., a trust may be resident where its trustees reside if the trustees are given, and exercise, the powers and discretions to manage and control trust property), the Court was unwilling to bind itself to a test that ignored a fact-driven analysis with a view to determining the place where central management and control were exercised.  In this case the facts supported the conclusion that the Barbados Trusts were resident in Canada.

The Court also held in obiter that section 94 of the Income Tax Act (Canada) applied to deem the Barbados Trusts to be resident in Canada. Paragraph 94(1)(b) requires that a trust acquire "property, directly or indirectly in any manner whatever," from a Canadian beneficiary or a person related to such beneficiary for the trust to be deemed to be resident in Canada. The Federal Court of Appeal held that the words "directly or indirectly in any manner whatever" meant that a transfer of property from one shareholder to another could also be an indirect transfer to the shareholder of the person that received the direct benefit of such transfer. The value of the Canadian corporation at the time of the freeze was greater than $50 million and, therefore, the freeze had resulted in a transfer of property from one shareholder (holder of the frozen shares) to another (holder of the growth shares).

Finally, the Court stated (in obiter) that if the Barbados Trusts had been found to be resident in Barbados, they would have been entitled to the benefits of the Treaty. The Court also briefly addressed the general anti-avoidance rule, saying that it would not apply to the transactions at issue.


It is too early to determine whether this case will be appealed to the Supreme Court of Canada and, if so, whether the Supreme Court will agree to hear the appeal. However, the decision in Garron establishes a new rule for determining the residency of trusts, and is expected to impact a large number of Canadian and non-resident trusts that currently determine residence based solely on the residency of the trustees. A trust will no longer be resident where its trustee resides if a trustee is simply a "rubber stamp" for decisions made by settlors or beneficiaries resident in jurisdictions different from the residence of the trustee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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