In Garron and Garron, Trustees of the Garron Family Trust v.
The Queen, released by the Tax Court of Canada on September
10, 2009, Madam Justice Woods applied a new and novel test to
determine the residency of a trust. She rejected the established
test in the landmark decision of Trustees of the Thibodeau
Family Trust, 78 DTC 6326 (FCTD) that a trust is resident in
the jurisdiction in which the trustees reside and exercise their
discretion. In fact she held that Thibodeau does not stand
for the proposition that the residence of the trustee is always the
deciding factor in determining the residence of a trust. In
Garron, Madam Justice Woods held 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. The central management and control test is that a
corporation [and now a trust?] is resident where its central
management and control actually abides.
The Canada Revenue Agency has taken the position in
Interpretation Bulletin IT-477 "Residence of a Trust or
Estate" dated May 30, 1980, that a trust will generally
be resident in the jurisdiction where the trustee who manages and
controls it resides. The reference to management and control echoes
the corporate test which was rejected in Thibodeau.
By way of background, Garron involved a determination
of the residency of two trusts formed in Barbados (the
"Barbados Trusts") and settled by a resident of St.
Vincent who was a friend of one of the beneficiaries. There was a
protector of each Trust who was resident in St. Vincent and who had
the right to replace the trustee of each Barbados Trust. The sole
trustee of each Barbados Trust was St. Michael Trust Corp. (the
"Trustee") a Barbados resident trust corporation, owned
by a major accounting firm. In 1998, two estate freezes were done
in favour of the Barbados Trusts in respect of the shares of two
Canadian holding companies which, in turn, owned the growth shares
of a private Canadian company in the auto parts business. In 2000,
the shares of the two holding companies were sold and a capital
gain of over $450 million in the aggregate was realized.
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 realized by the Barbados
Trusts were exempt from Canadian tax under Article XIII of the
Barbados-Canada Income Tax Convention (the "Treaty").
Barbados does not impose a tax on capital gains and as a result, if
the Treaty applied to exempt the gains from Canadian tax, there
would be no tax on the gains.
In determining that the Barbados Trusts were resident in Canada,
Madam Justice Woods relied on the fact that there was no evidence
that the Trustee took an active role in the management of the
Trusts. She also suggested that the Trustee had significant
expertise in accounting and tax matters but did not have a
demonstrated expertise in managing trust assets. She found that
there was little evidence that the Trustee had any involvement in
the affairs of the Barbados Trusts, other than in the execution of
agreements and in administration, accounting and tax matters.
Madam Justice Woods found that, more likely than not, the
Trustee "had agreed from the outset that it would defer to the
recommendations" of the Canadian resident beneficiaries (who
were also the principals of the Canadian operating company) with
respect to the purchase and sale of the shares of the holding
companies, the investment of cash proceeds received on the sale of
the shares, the making of distributions to beneficiaries of the
Barbados Trusts and taking appropriate steps to minimize the tax
burden of the beneficiaries.
This case is a significant departure from the established
Canadian case law dealing with the residency of trusts under
Canadian law and may affect the residency of many trusts, both
international and domestic. We note that the Canada Revenue Agency
has been using the same central management and control argument to
challenge the residency of certain Alberta trusts. It will be
interesting to see whether the Garron decision will be
appealed and what its ultimate impact will be. Perhaps the result
would have been different had the Trustee been more involved in the
decision making process with respect to the sale of the holding
company shares and the subsequent management of the assets of the
Barbados Trusts. For now, tax planners should ensure that a trust
is centrally managed and controlled in the jurisdiction where the
trustees are resident.
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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