Traditionally, courts have held that a trust is resident where the majority of its trustees are resident. However, the Garron Family Trust v. Her Majesty the Queen, 2009 D.T.C. 1287 (T.C.C.) decision shows that this rule will not always prevail.
On September 10, 2009, the Tax Court of Canada released its decision in Garron and several other cases heard on common evidence. The court held that two Barbados Trusts were resident in Canada for purposes of the Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the “Canada-Barbados Treaty”). Over $450 million in capital gains were realized by the two Trusts on the disposition of shares of Canadian corporations. Under Barbados domestic law, the gains were not subject to tax. The Trusts claimed they were exempt from Canadian tax under the Treaty. The Minister disagreed and assessed accordingly. The Trusts appealed. The Tax Court of Canada dismissed their appeals. This case is now under further appeal.
New Test for Residence of Trusts – Central Management and Control
Justice Woods, in this case, rejected that the oft-cited Federal Court decision in Thibodeau stands for the proposition that the residence of the trustee is always the deciding factor in determining the residence of a trust. In Garron, the court adopted a central management and control test for the residency of trusts. Justice Woods concluded that the "judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate. That test is 'where the central management and control actually abides'."
Factors in Determining Central Management and Control
In finding that the central management and control of the Trusts was located in Canada with the two Canadian principals, either directly or indirectly through their advisers, rather than with the Barbados resident Trustee, the court took a number of factors into account. Some of these factors included that:
- The “protector” of the Trusts could replace the Barbados Trustee, and the Canadian principals, with their spouses, could replace the “protector”;
- The internal memoranda of the Trustee evidenced a role actually more limited than the trust documents suggested;
- Investment decisions appeared to be at the direction of the Canadian principals with Canadian investment advisers;
- There was virtually no documentation showing that the Barbados Trustee took an active role in managing the Trusts;
- The documentary evidence was consistent with the Barbados Trustee being involved for the most part only in the execution of agreements, and in administrative, accounting and tax matters;
- At the relevant time, the Barbados Trustee was the arm of an accounting firm which provided significant tax advice regarding the overall offshore structure of the property held by the Trusts. It was questionable whether the Barbados Trustee had expertise in managing trust assets as opposed to the firm’s significant expertise in accounting and tax matters;
- There was no evidence that the Canadian principals were very interested in what the Barbados Trustee was doing and that the persons involved were competent, as would have been the case if the Barbados Trustee was actively involved in the sale of the shares at issue;
- The contact for the bank, the Bahamas branch which was used for the bank account of one of the Trusts, was made in Toronto;
- The directors of the Barbados Trustee had very little information regarding transactions to be approved before the directors ratified the transactions; and
- One of the Canadian principals oversaw the sale of the shares.
The court indicated that it could not be assumed that the Barbados Trustee did whatever was required to make sure the transactions undertaken by the Trusts were in the best interests of the beneficiaries. On this point, the court found that there was no evidence that the operator of the Barbados Trustee had expertise or significant experience in trust management nor was it a well-recognized trust corporation with significant experience and expertise in managing trusts.
Implications for Charitable Trusts
The analysis by the court in Garron on determining the residency of a trust may be relevant to trusts established for charitable purposes. One of the requirements which a charitable purposes trust must meet to be a “registered charity” for Canadian tax purposes is that it be “resident in Canada”. Where the central management and control of a charitable trust, which has received “registered charity” status or which is seeking “registered charity” status, might be considered to be outside of Canada, notwithstanding that all or the majority of its trustees are resident in Canada, the trustees may wish to get legal advice regarding this issue.