Who controls your estate or trust? Their residence may have serious tax implications and it might not be where you expect.
The Canada Revenue Agency (CRA) taxes on the basis of the resident status of an entity in a particular tax year. This can raise concerns about the residency status of an estate which is held in a trust managed by a group of trustees and/or located in a foreign country.
Our tax professionals have provided a summary of the residence of an estate/trust as per the Income Tax Act (ITA), based on Fundy Settlement v. Canada 2012 SCC 14 (Fundy).
Trust Resident Rule
1. A trust is generally considered to reside where the trustee, executor, administrator or other legal representative (who manages the trust or controls the trust assets) resides. The residence of the beneficiaries or the settler of an estate is not a factor when making the residency determination.
2. The trustee who has management and control of the trust, while he may not have physical possession of the trust assets, will be the person who has most or all of the following powers or responsibilities:
• control over changes in the trust’s investment portfolio,
• responsibility for the management of any business or property owned by the trust,
• responsibility for any banking or financing arrangements for the trust,
• control over any other trust assets,
• ultimate responsibility for preparation of the trust accounts and reporting to the beneficiaries, and
• power to contract with and deal with trust advisors, such as auditors and lawyers.
3. If a corporation or a branch office exercises the management and control of a trust, the trust’s residence is determined in the same way that the residence of a corporation is determined.
4. If more than one trustee is involved in the management and control of the trust, the trust will reside in the jurisdiction of the trustee who exercises 50% or more of such management and control.
5. There may be situations where it is determined that a trust is resident in Canada despite another country considering the trust to be resident in that country.
However, the recent Fundy case emphasizes the importance of the role the person exercising central management and control plays in determining the residence of the trust. This may or may not be the trustee.
Background
In the Fundy case, two offshore family trusts were created for the benefit of Canadian resident beneficiaries. The Trustee (a corporation resident in Barbados) disposed of shares held by the trust in two Ontario corporations. The purchaser gave C$152 million to the Minister of National Revenue as Canadian withholding tax on capital gains realized by the trusts from the sale of shares. The Trustee applied for a refund under the Canadian-Barbados Tax Treaty, claiming that the profits should not be subject to Canadian Capital Gains Tax, as the trusts were located in Barbados and not Canada. The CRA, however, refused the request, citing that the trusts were resident in Canada and owed Canadian income tax on the capital gain realized from the share disposition.
The Supreme Court (SC) supported the decision of the Canadian Tax Court and Federal Court that the Trust was indeed resident in Canada. Based on the “central management and control” concept used in the case of corporations, the SC concluded that the trustee neither made decisions on behalf of the trust, nor exercised its powers and discretions provided under the trust deeds. Instead, the SC concluded that two of the principal beneficiaries (both residents in Canada) were the actual decision-makers for the Trust.
Management and control
The CRA relies on the central management and control test to determine the residence of an estate or trust. The deceased individual cannot contribute to the “resident” status of the estate owing to his/her death.
Trustees should demonstrate that they exercise power in the management and control of the trust by having paperwork in place to support the fact that all the decisions were indeed made by them. Beneficiaries or other persons should avoid making any decisions on behalf of the trust that would bypass or undermine the trustee’s authority.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
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- Disclosure of Foreign Assets and other information filings
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