On March 13, 2012, the Supreme Court of Canada is tentatively scheduled to hear an appeal by the trustee of two trusts (St. Michael Trust Corp., as trustee of the Fundy Settlement – a.k.a. the Garron Trust – and the Summersby Settlement – a.k.a. the Dunin Trust).
Each Trust was settled by an individual resident in St. Vincent and had Canadian beneficiaries. The trustee of each Trust was a Barbados corporation. In 2000, each Trust disposed of shares it owned in a Canadian corporation to an arm’s length purchaser and thus realized a capital gain.
The capital gains for Canadian income tax purposes were approximately $217 million for the Garron Trust and approximately $240 million for the Dunin Trust. The capital gain inclusion rate at the relevant time was 2/3, so that the taxable amounts were approximately $145 million for the Garron Trust and approximately $160 million for the Dunin Trust. The capital gains were not subject to tax in Barbados.
The purchaser withheld and remitted amounts to the Canadian government in accordance with section 116 of the Income Tax Act. The trustee sought a return of the withheld amount, claiming an exemption from tax pursuant to paragraph 4 of Article XIV of the Canada-Barbados Income Tax Agreement (1980). Under the exemption, tax would only be payable in the country in which the seller was resident, and the trustee contended that each Trust was a resident of Barbados.
The Minister of National Revenue assessed on the basis that the exemption in the treaty did not apply because each Trust was a resident of Canada. The trustee appealed on behalf of the Trusts. The Tax Court of Canada and the Federal Court of Appeal dismissed the appeals.