Canada: Supreme Court Of Canada Upholds New Test For Residency Of Trusts

The Supreme Court of Canada (the SCC) released its decision in Fundy Settlement v. Canada (a.k.a. St. Michael Trust Corp. or Garron Family Trust). A unanimous panel of seven judges dismissed the taxpayer's appeal, as had the two courts below. This decision confirms the original ruling of Woods J. of the Tax Court of Canada (the Tax Court) that the "central management and control" test used to determine residency of corporations for tax purposes also applies to the determination of the residence of trusts.


This case – one of two companion cases with substantially similar facts – dealt with a family trust settled by an individual resident in St. Vincent, for the benefit of Canadian resident beneficiaries. The trustee of the family trust, St. Michael Trust Corp. (St. Michael), is a corporation resident in Barbados. When the trust disposed of the shares of two Canadian resident corporations, the purchaser withheld and remitted C$152-million of the proceeds pursuant to section 116 of the Income Tax Act (Canada) (the Act), presumably on the assumption that the trust was a non-resident of Canada. St. Michael applied for a refund of these funds on the basis that the trust was a resident of Barbados and exempt from Canadian income tax on the gain realized pursuant to the Canada-Barbados Income Tax Convention (the Convention). The Canada Revenue Agency (CRA) refused the request for a refund, taking the position that the trust was resident in Canada and owed Canadian income tax on the capital gain realized on the disposition.

Decision of Supreme Court of Canada

The SCC's unanimous decision focuses on the question of the appropriate legal test for determination of the residence of a trust (for a complete discussion of the Tax Court decision, please refer to our October 2009 Blakes Bulletin: Tax Court of Canada Decisions Relating to Non-Resident Trusts). St. Michael argued that the residence of the trust must be the same as the residence of the trustee for two reasons: (i) trusts, unlike corporations, are not "persons", making the central management and control test inapplicable to trusts, and (ii) the effect of subsection 104(1) of the Act is to treat a trust as essentially identical to its trustee for all purposes, including residence. The SCC rejected both of these arguments.

The SCC acknowledged in response to the first argument that at common law a trust has no legal personality. However, subsection 104(2) of the Act deems a trust to be, in respect of trust property, an individual. Therefore, a trust is clearly deemed to be a person (an individual) for purposes of the Act.

St. Michael's second argument relied on subsection 104(1) of the Act, which provides that in the 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 ...". The SCC held that no provision of the Act, including subsection 104(1), established a legal rule requiring that the residence of a trust must be the residence of the trustee. The SCC relied on the charging provision in subsection 2(1) of the Act, referring to tax being payable by a "person resident in Canada", to support the conclusion that it is the residence of the taxpayer whose taxable income is being subject to tax, i.e., the trust and not the trustee, that must be determined.

The SCC pointed to several similarities between trusts and corporations to justify the application of the same "central management and control" test to determine their residence for tax purposes. The SCC also agreed with the Tax Court that the adoption of a similar test for trusts and corporations promotes the "important principles of consistency, predictability and fairness in the application of tax law."

Therefore, as with a corporation, a trust will be considered resident in the place where "its real business is carried on", which the SCC, citing both Canadian cases and decisions of the House of Lords, confirmed is "where the central management and control actually abides." In the corporate context, central management and control will generally be exercised where the board of directors exercises its responsibilities. However, where the facts are that 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 that shareholder resides.

Applying this test to the present case, the SCC noted that the Tax Court found as a fact that the main beneficiaries of the trust exercised the central management and control of the trusts in Canada, and that St. Michael had a limited role with little or no responsibility. The Tax Court found that St. Michael's role was to execute documents as required and provide incidental administrative services, and it was generally not expected that St. Michael would have responsibility for decision-making beyond that. Although there was no explicit evidence that this was the case, the Tax Court came to this conclusion based on the evidence as a whole including the failure of the appellants to provide evidence establishing otherwise. Woods J. noted in her decision that although the administrative nature of the trustee arrangement was likely unwritten, it was effectively enforceable through a protector mechanism that allowed the protector to replace the trustee, and the protector itself could be replaced by the beneficiaries. The Tax Court also found that, more likely than not, St. Michael had agreed from the outset that it would defer to the beneficiaries' recommendations, and that the beneficiaries also understood this to be the arrangement.

The factors the Tax Court considered in concluding that St. Michael had a limited role were as follows:

1. Internal Memoranda Indicating Limited Role: There were internal memoranda setting out the intentions of St. Michael, and these documents showed that St. Michael's role would be more limited than contemplated in the trust indentures. Specifically, it was found that the internal memoranda indicated that St. Michael's role in respect of the arm's-length share sale was administrative in nature and that St. Michael would not make distributions to certain beneficiaries without the consent of other beneficiaries.

2. Trust Investments Appeared To Be Under Control of the Beneficiaries: The evidence also suggested that investment of the share sale proceeds was under the direction of certain Canadian resident beneficiaries of the trust because the investment advisers were the same as the applicable beneficiaries' investment advisers and the advisers appeared to have been selected and directed by these beneficiaries rather than by St. Michael.

3. Tax Advisers Appeared To Be Directed by the Beneficiaries: The evidence suggested that the tax minimization plans developed by the tax advisers were under the direction of certain of the beneficiaries of the trust rather than St. Michael.

4. No Documentation Was Provided as Evidence that St. Michael Played an Active Role: There was no documentary evidence that St. Michael had any involvement beyond executing agreements and providing administrative services.

5. St. Michael's Expertise in Managing Trust Assets Was Questionable: For a significant period of time, St. Michael had been an arm of an accounting firm, and was likely formed to complement the tax services offered by the firm. The Tax Court found that it was questionable on the evidence whether the firm had any expertise in managing trust assets.

6. Oral Testimony Was Not Inconsistent with the View that St. Michael Had a Limited Role: The oral testimony was also consistent with the view that St. Michael had a limited role because it appeared that St. Michael was not sufficiently informed of matters related to the share sale transactions, the beneficiaries seemed to have little interest in what St. Michael was doing, St. Michael appeared to have done minimal due diligence (e.g., on investments of the trust) to ensure that its fiduciary obligations were being complied with and St. Michael did not appear knowledgeable about the trust's investments.

While residence of a trust may in some cases be in the place of residence of the trustee where the trustee carries out the central management and control of the trust, that was not found to be the case here.

The SCC explicitly declined to deal with two other arguments raised by the Crown. One dealt with a specific anti-avoidance rule in section 94 and the other involved the general anti-avoidance rule in section 245 (the GAAR). The SCC noted it did not need to deal with these points, but added the extra comment that the SCC's decision not to address these issues should not be taken as an endorsement of the reasons of the Federal Court of Appeal (the FCA) on those matters.

Unlike the Tax Court judge, the FCA had applied a very broad reading of the words "the trust ... has ... acquired property, directly or indirectly in any manner whatever" in paragraph 94(1)(b) of the Act. Under that broad reading, the SCC concluded that a shift in the value of the shareholdings of the corporations owned by the trusts in this case constituted an acquisition of property by the trusts. The FCA held that if the central management and control test did not apply to the trust in this case, the trust would be deemed a resident of Canada for certain purposes under subsection 94(1). Yet the trust would still be considered a resident of Barbados under the Conventionbecause of the limited purposes for which the deeming rule in subsection 94(1) applied. On that basis, the trust would have been exempt under the Convention from Canadian income tax on the gain realized on the share disposition. The FCA further held, with very limited discussion, that the GAAR would not apply to these transactions. This holding was consistent with that of the Tax Court.

Some Implications of the Decision

1. Need to Re-Examine Trust Relationships
The SCC's decision puts to rest any doubt that the legal test applicable to determine a trust's residence for tax purposes is the central management and control test. Taxpayers that have relied exclusively on the residence of a trustee as being determinative of the residence of a trust should re-examine their arrangements.

2. Need for Legal Substance
It is clear that the issue of legal "substance" remains critical for the threshold question of establishing residence. The SCC's decision demonstrates that a presumption that central management and control resides in the place of residence of a trustee of a trust (or by analogy, the place where the board of directors of a corporation meets) can be displaced where evidence to the contrary is available. Trusts or corporations wishing to establish residence in a treaty jurisdiction should ensure that meaningful decisions regarding the management of these entities are made in that jurisdiction. Evidence of physical meetings in the jurisdiction and that relevant information is being provided to permit meaningful decisions to be made is important to support the residence of trusts and corporations in a particular jurisdiction. As this decision emphasizes, having local agents that merely "rubber stamp" documents will not be sufficient to establish central management and control in a particular place. By contrast, the recent decision of the Tax Court in Velcro Canada Inc. v. Her Majesty the Queen (for a detailed discussion of this case, please refer to our March 2012 Blakes Bulletin: Velcro Canada Case: Latest Chapter in Treaty Shopping) seems to have placed less emphasis on the governance of a holding company for purposes of determining beneficial ownership of certain payments for treaty purposes.

3. Test for Residence of Corporations Not Incorporated in Canada
This decision also has implications beyond the trust context. Although it was widely understood and assumed for many years that the "central management and control" test applied to the determination of residence of corporations for Canadian tax purposes, this decision provides one of the few higher-court confirmations of this principle. The decision now provides definitive and unambiguous authority for the application of the "central management and control" test to corporations where residence is not determined by a deeming rule in the Act.

4. Possible Effect on Provincial Tax Rates for Domestic Trusts?
In recent audits of Canadian resident trusts, the CRA has taken the position that trusts are resident in the province of residence of the beneficiaries, rather than the province of residence of the trustee. This affects the provincial tax rate applicable to the trusts. It will be interesting to see how the CRA applies the SCC's decision in this context.

5. Topics for Another Day
This decision leaves the issues of the interpretation of section 94 of the Act and of the application of the GAAR in a treaty context to be addressed, if at all by the SCC, in future cases.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions