Trust Residency Post-Fundy
Matt Trotta and Rami Pandher of Nerland Lindsey LLP discussed recent jurisprudence and best practices in respect of provincial trust residency in their featured article first published by the Canadian Tax Foundation in Canadian Tax Highlights, February 2018.
To summarize, the SCC in Fundy Settlement (2012 SCC 14) held that a trust's residence is the location of its central management and control, not the trustees' residence. A growing body of jurisprudence from superior courts across Canada now uses this test to determine a trust's provincial residence. (See, for example, Discovery Trust, 2015 CanLII 34016 (NLSC); Boettger, 2017 QCCA 1670; and Herman Grad 2000 Family Trust, 2016 ONSC 2402) These cases demonstrate that a trustee must exercise independence and maintain proper documentation of his or her decisions. In each case, trusts were set up in Alberta for beneficiaries in Newfoundland and Labrador, Quebec, and Ontario, respectively. The courts determined residence to be where the discretionary powers of managing and controlling the trust property took place.
Notably, in light of these decisions, the importance for trustees to truly exercise decision-making powers and discretions where the trust is intended to be resident has become even more important. Many trust deeds stipulate their intention vis-à-vis the applicable law and the trust's jurisdiction, but the courts have been increasingly clear that the facts determine these matters.
As a result, care should be taken in selecting an individual trustee. An individual may spend significant time in another jurisdiction while acting as trustee: if he or she is the sole trustee or acts as a dominant trustee, the trust may be found to be resident in a less advantageous jurisdiction. However, choosing a trustee simply because he or she resides in a desirable jurisdiction will not be sufficient to establish residence if the trustee cannot demonstrate independence or performs merely administrative or directed tasks. Additionally, consultation with beneficiaries is not fatal but should be approached with caution.
An adviser should emphasize that a settlor or beneficiary may need to relinquish a significant degree of control over trust assets to ensure that the trust is resident in the desired jurisdiction. If the trustees have limited control, or decisions are made in multiple jurisdictions, a court must determine the place of control, with perhaps uncertain results. Having the settlor as a trustee is not alone sufficient to invoke subsection 75(2) of the Income Tax Act; but if a settlor-trustee does not relinquish control in the trust and retains power to amend the trust's terms, he or she may be caught under attribution rules for any trust gains (see, for example, CRA document no. 2016-0669881I7, February 16, 2017).
Often, a lack of certainty concerning a trust's residence may result in a reduction or loss of associated tax benefits.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other related matter, please do not hesitate to contact one of the lawyers in the tax and estate planning group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.