A triumph of functionalism over formalism: SCC holds that the test for determination of residence of a trust is “central management and control

by Dentons
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Less than a month after hearing oral argument on March 13, 2012, the Supreme Court of Canada today released judgment and reasons for judgment in the Fundy Settlement v. Canada also known as the Garron Family Trust appeals (St. Michael Trust Corp., as Trustee of the Fundy Settlement v. The Queen and St. Michael Trust Corp., as Trustee of the Summersby Settlement v. The Queen). The Court’s alacrity is remarkable, particularly in light of the fact that it had taken nearly eleven months to release its last tax decision (Copthorne Holdings Ltd. v. The Queen).

See here for a summary of the oral argument before the Supreme Court of Canada and here for the facts, the reasons for judgment of the Tax Court and Federal Court of Appeal and the factum filed by each party in the Supreme Court of Canada.

In Fundy Settlement, a unanimous panel of seven (Justices LeBel, Deschamps, Fish, Abella, Rothstein, Moldaver and Karakatsanis) dismissed the Trustee’s appeals and held that the test for the determination of the residence of a trust is the same test as the corporate test, namely, the place where “central management and control” is exercised. The reasons were written by the “Court” which further serves to highlight the unanimity of opinion among the judges who heard the appeals.

In a ringing endorsement of the reasoning of Justice Judith Woods of the Tax Court of Canada and Justice Karen Sharlow of the Federal Court of Appeal (both of whom had used a “functional analysis” to decide the issue) the Court explained, in a relatively brief 19 paragraph decision, why it agreed with the lower courts on this issue:

[14] . . . there are many similarities between a trust and corporation that would, in our view, justify application of the central management and control test in determining the residence of a trust, just as it is used in determining the residence of a corporation. Some of these similarities include:

1) Both hold assets that are required to be managed;

2) Both involve the acquisition and disposition of assets;

3) Both may require the management of a business;

4) Both require banking and financial arrangements;

5) Both may require the instruction or advice of lawyers, accountants and other advisors; and

6) Both may distribute income, corporations by way of dividends and trusts by distributions.

As Woods J. noted: “The function of each is, at a basic level, the management of property” (para. 159).

[15] As with corporations, residence of a trust should be determined by the principle that a trust resides for the purposes of the Act where “its real business is carried on” (De Beers, at p. 458), which is where the central management and control of the trust actually takes place. As indicated, the Tax Court judge found as a fact that the main beneficiaries exercised the central management and control of the trusts in Canada. She found that St. Michael had only a limited role ― to provide administrative services ― and little or no responsibility beyond that (paras. 189-90). Therefore, on this test, the trusts must be found to be resident in Canada. This is not to say that the residence of a trust can never be the residence of the trustee. The residence of the trustee will also be the residence of the trust where the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident. These, however, were not the facts in this case.

[16] We agree with Woods J. that adopting a similar test for trusts and corporations promotes “the important principles of consistency, predictability and fairness in the application of tax law” (para. 160). As she noted, if there were to be a totally different test for trusts than for corporations, there should be good reasons for it. No such reasons were offered here.

[17] For these reasons, we would dismiss the appeals with costs.

In light of its conclusion on the main issue, the Court did not find it necessary to deal with the Crown’s alternative arguments, namely the application of section 94 of the Income Tax Act or the General Anti-Avoidance Rule.

 

 

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