Since the decision of the Supreme Court of Canada in St. Michael Trust Corp., as Trustee of the Fundy Settlement v. Her Majesty the Queen.,1 the tax community has been abuzzwith the fact that trusts are now subject to the same "central management and control" test applicable to corporations when determining the residence of a trust. In Mark Higgins Rallying (a firm) v. The Commissioners for Her Majesty's Revenue and Customs,2 theFirst-Tier Tribunal (Tax Chamber) concluded that the "management and control" testapplicable to corporations was also applicable to partnerships. That case conducted an excellent analysis of what this phrase really means from a UK context. In a nutshell, theTribunal concluded that the case law has identified the following principles:
(1) The residence of a company is where the directors meet and transact their business and exercise the powers conferred upon them;
(2) The determination of management and control is a question of fact and, consequently, there is no presumption that management and control will be found where the directors meet;
(3) In considering the facts, it must be determined (a) who was managing the business by making high-level decisions, and (b) where those persons were making such decisions.
In the Mark Higgins Rallying case, Mark Higgins, a motor rally driver, and Roy Dixon, a former rally driver, were both residents of the Isle of Man. Upon discovering Mr. Higgins' immense driving talents, Mr. Dixon saw a business opportunity and agreed to mentor, manage, and sponsor Mr. Higgins' rally career. In addition to being an astute businessman, Mr. Dixon was also a qualified solicitor in the United Kingdom with extensive experience drafting partnership agreements and business contracts.
In 1991, Mr. Dixon and Mr. Higgins entered into a partnership agreement,3 pursuant to which the two men agreed to combine Mr. Dixon's management and commercial experience with Mr. Higgins' driving skills (the "Partnership"). Mr. Dixon's plan was for Mr. Higgins to compete on the world rally scene and, consequently, the Partnership carried on business throughout the world and not just in the United Kingdom.
In 1993, Mr. Higgins moved his family to the United Kingdom to commence the running of a rally school, while he continued to compete in worldwide rally racing. In 1997, the first year in which the Partnership became profitable, Mr. Higgins and Mr. Dixon agreed to vary the terms of the partnership agreement with the primary purpose being to change the profit-sharing structure. As a result of the new structure, Mr. Dixon was precluded from receiving any UK sourced income from the Partnership.
Despite Mr. Higgins' move to the United Kingdom, the working basis of the Partnership was always that Mr. Higgins concentrated on fulfilling his passion for driving while Mr. Dixon contributed commercial and management experience. Mr. Dixon reviewed all contracts to determine whether they were appropriate. All major contracts of the Partnership, except for one, were executed outside of the United Kingdom. Due to Mr. Higgins' involvement in rally racing, most opportunities arose through his personal contacts and communications generally occurred by email or telephone. All major decisions were made by Mr. Dixon in the Isle of Man, where he continued to live throughout the life of the Partnership.
For the purposes of UK tax law,4 a partnership that is managed and controlled outside of the United Kingdom will be treated as a separate person and, therefore, non-UK sourced profits are not taxable in the United Kingdom until they are paid out to a UK resident partner. Conversely, a partnership that is at least partially managed and controlled inside the United Kingdom will not be treated as a separate person, and, therefore, a UK resident partner's non-UK sourced profits are immediately taxable in the United Kingdom at the time they are earned.
The Commissioners for her Majesty's Revenue and Customs ("HMRC") in the United Kingdom took issue with the Partnership, arguing that management and control of the Partnership took place in the United Kingdom, and, therefore, all income earned by Mr. Higgins through the Partnership should be taxed as it arose. In support of its position, HMRC argued that while Mr. Higgins relied on Mr. Dixon at the inception of the Partnership, Mr. Higgins became an established professional able to make business decisions for himself. While Mr. Dixon brought his legal background in reviewing contracts to the table, this was the extent of his contribution to the Partnership. Conversely, the rallying, teaching, and seeking sponsorship opportunities, all of which were carried out by Mr. Higgins, constituted the substantive decision making part of the business. HMRC argued that the place where contracts were signed was irrelevant because the decisions to enter into such contracts were made well before they were signed. HMRC concluded that because the activities of the Partnership were carried on in the United Kingdom by Mr. Higgins, management and control resided, at least partially, in the United Kingdom.
The Partnership took the position that it was wholly managed and controlled outside the United Kingdom because all decision making, partnership meetings, and contracts were made outside of the United Kingdom, and thus Mr. Higgins was only taxable once the Partnership distributed income to him. The Partnership further argued that the occasional act of high-level management performed in the United Kingdom did not affect management and control of the Partnership.
Relying on the UK Court of Appeal's decision in Padmore v. IRC,5the Partnership argued that the determination of where a partnership is managed and controlled depends on the place where the highest level of decision making takes place and not where the day-to-day business operations are carried out. That case involved a partnership of 110 chartered patent agents that were active as trademark agents, the majority of which were resident in the United Kingdom. The Court of Appeal had no trouble finding, however, that despite the fact that the majority of partners were resident in the United Kingdom, the partnership was managed and controlled in Jersey because the business operations had always been carried on in Jersey, the two general partners were residents of Jersey, general meetings of the partners were held in Jersey four times a year, all policy matters and decisions were dealt with at these meetings, and the Jersey-resident managing partners implemented all of the policy matters and decisions.
Findings of the Tribunal
Once the Tribunal had concluded that the corporate test for management and control was applicable to partnerships, it was simply a matter of applying the test to the facts.
The corporate test requires a determination of where central management and control is situated by looking to where high-level decisions are made. The Tribunal concluded that while the determination must be made for each disputed tax year, residence of the Partnership will not fluctuate from year to year merely by reason of individual acts of management and control taking place in different territories. Consequently, it is necessary to apply the facts to take a picture as a whole to determine who was managing the Partnership by making high-level decisions and where such decisions were being made.6
There is no presumption that a company will be resident where contracts (including important ones) are signed or in the place where directors meetings are held. While both may be evidence towards where decisions were being made, they are not the determining factors. What is relevant, however, is where the decision making in relation to those contracts and the directors' meetings actually takes place.
Taking a look at the picture as a whole, the Tribunal found that the basis of the formation of the Partnership and the continuing purpose of the Partnership was to combine Mr. Higgins' driving skills with Mr. Dixon's business acumen and expertise. Throughout the existence of the Partnership, Mr. Higgins relied on Mr. Dixon's commercial expertise and did not enter into any significant commercial commitments without referring them to Mr. Dixon for a decision. The Tribunal concluded that management and control of the Partnership in the relevant years was situated wholly outside the United Kingdom because Mr. Dixon, as the commercial brains of the Partnership, made all the high-level decisions of the Partnership from his office in the Isle of Man.
From a Canadian Perspective
Although Mark Higgins Rallying dealt with partnerships, the fact that the corporate test for management and control was appropriate for determining residency makes the case relevant for Canadian tax purposes. The management and control test has been adopted in Canada for determining the residency of both corporations7 and trusts.8 The law in Canada has not developed to the same level as that in the United Kingdom and, consequently, little guidance exists for applying the test.9 In St. Michael Trust,10 the Supreme Court of Canada explained that a fact-based review of central management and control of a corporation (or trust) is determinative, but did not explain how to apply the facts to make the determination. In Mark Higgins Rallying, it is clear that it was necessary to take a high-level picture of the operation by determining who was managing the business by making high-level decisions and where those persons were when they made those high-level decisions. Due to the lack of guidance in Canada, it is possible that the Canadian courts could consider this approach in the future.
1 2012 DTC 5063.
2  UKFTT 340 (TC).
3 While not stated in the case, the facts suggest that the Partnership was formed in the Isle of Man.
4 As set out in sections 111 and 112 of the Income and Corporations Taxes Act 1988 (UK).
5  STC 493 at 495.
6 This approach is similar to the Court of Appeal's decision in De Beers Consolidated Mines Ltd. v. Howe (Surveyor of Taxes), 5 TC 198 at 212-213 where that Court concluded that one looks to the place where the high-level decisions are made, as distinct from the place where day-to-day business operations are carried out.
7 British Columbia Electric Railway v. R., 2 DTC 692 (1945); Crossley Carpets (Canada) Ltd. v. MNR, 67 DTC 522 (1967); and 1143132 Ontario Ltd. v. R., 2009 DTC 1312 (T.C.C.).
8 St. Michael Trust, supra note 1.
9 See, for example, British Columbia Electric Railway, Crossley Carpets, and 1143132 Ontario Ltd., supra note 7.
10 St. Michael Trust also relied on De Beers, supra note 6, as authority for corporate residency being based on where management and control is exercised. St. Michael Trust did not, however, consider the distinction between where high-level decisions are made as compared to where day-to-day business operations arecarried out.
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