Canada: Supreme Court Of Canada Considers Residency Of A Trust In St. Michael Trust Corp.

Paul R. LeBreux LLB, LLM (Tax),St. Michael Trust Corp. v. The Queen is the first appeal where the Supreme Court of Canada has considered the test for residency of a trust for tax purposes. The appeal was heard merely four weeks ago. We were surprised when printing out the Court's judgment that its pages could be bound by a standard staple, which is exceedingly rare for a complex tax appeal. The importance of residency status is that a Canadian-resident taxpayer, including a trust, is taxable in Canada on worldwide income.

The St. Michael Trust case involved an offshore estate freeze. The plan was to avoid Canadian capital gains tax on the eventual sale of a Canadian corporation, PMPL. To achieve this, a trust was formed in Barbados (the "Fundy Settlement"), which subscribed for shares of a new Canadian holding company, which in turn held shares of PMPL. The trustee of the Fundy Settlement was St. Michael Trust Corp., a Barbadian trust company owned by partners of a large public accounting firm. The beneficiaries of the Fundy Settlement were Mr. Garron and his family. A similar structure, with a holding company and a trust (the "Sommersby Settlement") was implemented for the other shareholder of PMPL, Mr. Dunin, the beneficiaries of which were Mr. Dunin and his family.

Ultimately, the shares of the holding companies were indeed sold, resulting in capital gains of CAD $217 million for the Fundy Settlement and CAD $240 million for the Sommersby Settlement. Both trusts claimed their respective capital gains were exempt from Canadian tax by virtue of the Canada-Barbados tax treaty. The treaty exemption was only available if the trusts were resident in Barbados.

The trustee argued that the appropriate test for residency status of a trust is the residence of the trustees, consistent with previous case law. The Minister of National Revenue (the "Minister") said the test should be "central management and control", which is the residency test used for corporations. Before this case, there had been little judicial authority regarding the appropriate test for residency of a trust, so practitioners were hopeful that the Supreme Court would provide some helpful guidance in this critical and uncertain area of tax law.

As discussed in our past blogs, the Minister was successful at the Tax Court of Canada and the Federal Court of Appeal. The Minister was also successful at the Supreme Court of Canada, which decided the test for residency of a trust is central management and control. The Court described a trust's place of central management and control as being the place "where its real business is carried on". In this case, the Tax Court's finding was that the beneficiaries of the trusts exercised central management and control from Canada whereas the role of the trustee was limited to administrative services and the trustee had little or no responsibility. Applying the central management and control test to these facts, the Supreme Court upheld the lower Courts' decisions.

The Supreme Court agreed with the Tax Court's earlier statement that adopting a similar residency test for trusts as for corporations promotes "the important principles of consistency, predictability and fairness in the application of tax law." Despite these views expressed by the Courts in this case, from a practitioner's perspective we think this case leaves open a number of issues worthy of comment.

  1. The central management and control test is said to be the place "where its real business is carried on". But what does this mean in the context of a trust? The "business" of a trust is typically to simply hold property, which depending on the situation may involve very little activity. Unlike a corporation, there may not be day-to-day decision making required.
  2. The Federal Court of Appeal provided some guidance regarding the central management and control test. In Justice Sharlow's view, it is acceptable for a beneficiary to make recommendations to trustees, but if beneficiaries exercise the trust powers or trustees' discretions, then the beneficiaries are controlling the trust.1 Did the Supreme Court intend to adopt the analysis of the Federal Court of Appeal on a wholesale basis, at least as far as the central management and control test is concerned?2
  3. If the location of central management and control changes from year to year for whatever reason, does this mean the residence of a trust also changes from year to year?
  4. A trustee has a fiduciary duty to manage the trust property. Is the central management and control test predicated on the presumption that a trustee is generally in breach of that duty, at least for purposes of a tax appeal, until the trustee proves otherwise?
  5. Further to the above, if central management and control is found to be exercised by someone other than a trustee (for example, a beneficiary or a financial advisor), will that trustee be in breach of the fiduciary duties it owes to the beneficiaries for allowing its control to be subverted?
  6. The genesis of the central management and control test was a 1906 decision in De Beers Consolidated Mines, Ltd. v. Howe­.3 However, business was very different and much more regional in nature than it is today. In 1906, there were no fax machines, no e-mail, no internet, aviation was in its infancy and there was no commercial air travel, and long distance telephone calls were much more expensive and less reliable. Today, it is not uncommon for a board of directors to be comprised of individuals in various jurisdictions making decisions using electronic communication. Arguably, the world has changed sufficiently that it is worthwhile for a Court to reconsider the principles in the De Beers case.
  7. A trust is fundamentally different from a corporation. For example, a trustee owes fiduciary duties to its beneficiaries, whereas directors of a corporation do not owe fiduciary duties to the shareholders. Instead, they owe a fiduciary duty to act in the best interests of the corporation. Is the central management and control test reconcilable with this difference?
  8. Given the above, one could query whether or not this decision will help to achieve the principles of consistency, predictability and fairness in the application of tax law. It seems to us that this case has the potential to do quite the opposite when trying to assert where a trust is resident for tax purposes.
  9. The United States has a codified test to determine whether the trust is domestic or foreign for US purposes.4 Should Canada adopt a similar model to achieve the consistency, predictability and fairness principles espoused by the Courts?

Stay tuned... much ink will be spilled on this matter in the years to come. In the meantime, trustees will have to be mindful of the central management and control test to ensure that the trust's residency is in the place that they desire it to be.


1 2010 FCA 309 at paragraph 68.

2 We note the Court was explicit that it was not necessarily adopting the reasoning of the Federal Court of Appeal on certain other issues that it did not consider necessary to decide upon.

3 [1906] A.C. 455 (H.L).

4 IRC § 7701(a)(30)(E) and (31)(B).

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.

Kim G.C. Moody
Events from this Firm
27 Oct 2018, Seminar, London, UK

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

1 Nov 2018, Seminar, Doha, Qatar

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

3 Nov 2018, Seminar, Dubai, United Arab Emirates

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

Similar Articles
Relevancy Powered by MondaqAI
Alexander Holburn Beaudin + Lang LLP
PwC Management Services LP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Alexander Holburn Beaudin + Lang LLP
PwC Management Services LP
Related Articles
Related Video
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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