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A trust is not a legal entity, but rather a relationship where legal property ownership is in the hands of a trustee, and beneficiaries are entitled to that property. Still, a trust is a taxable entity—so where should it be taxed?

Prior to 2012, many people thought a trust would be resident where its trustee was resident. If that were true, a settlor could potentially achieve tax savings merely by appointing a trustee in a jurisdiction with lower tax rates.

SCC clarifies trust residency

The Supreme Court of Canada (SCC) ruling, Fundy Settlement v Canada (2012 SCC 14), clarified the rules. In that case, Canada sought tax jurisdiction over a trust with almost half a billion dollars of capital gains, Canadian-resident beneficiaries and a trustee resident in Barbados. The Barbados tax system was much more generous to the taxpayer.

The SCC ruled there was no rule stating that the residence of a trust invariably must be the residence of the trustee. Instead, the court held that residence should be determined based on where the central management and control of the trust actually took place. The SCC ruled that the purported trustee was being directed from Canada, making the trust Canadian-resident.

While the substance of Fundy Settlement addressed jurisdiction between two sovereign nations, the principles apply similarly at an inter-provincial level.

This past June, a judgment from Newfoundland and Labrador took guidance from this earlier case, although it came to a much different result for the trust taxpayer.

From Newfoundland to Alberta

In 1987, Craig Dobbin founded CHC Helicopter Corporation, a transportation company servicing the oil and gas industry in Canada and abroad.

The business was successful enough that Dobbin implemented an estate freeze in 2002, a central component of which was a transfer of shares into the newly settled Discovery Trust. The beneficiaries and trustees were Dobbin’s five adult children, most or all of whom were residents of Newfoundland and Labrador.

In 2006, the trust was amended to appoint a successor trustee, Royal Trust (RT), which was a corporation resident in Alberta. Dobbin had been experiencing health issues, and died later that year. From the time of his death through 2008, a series of transactions were undertaken to wind up the corporate interests held by the estate. RT filed its 2008 trust return as a resident of Alberta.

In 2012, CRA reassessed the trust as being resident in Newfoundland, calculating the shortfall of provincial tax at $8.8 million, plus arrears interest of almost $1.5 million. The trust appealed the reassessment to court.

Improper tax motivation?

CRA’s position was that the Dobbin children made all trust decisions and that RT merely served in an administrative capacity. The principal investigator’s report went so far as to conclude that RT was appointed solely to resituate the trust to Alberta.

This last point the judge considered irrelevant. Referring to IRC v Duke of Westminster (1936), he said it was Craig Dobbins’ prerogative to attempt to reduce taxes by amending the trust to bring it under Alberta’s jurisdiction.

Still, there remained the matter of whether RT factually exercised central management and control. After reviewing the material transactions, the judge concluded that it had fulfilled its obligations.

Though some documents and processes were initiated by others, RT acted independently in reviewing all transactions in order to make informed decisions that protected the best interests of the beneficiaries. As such, the judge ruled the trust was resident in Alberta.

As for the assertion that the taxpayer had improper tax motivation, the judge found to the contrary: that the investigator’s negative view compromised the review’s integrity and, in turn, the foundation for the reassessment.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president, Tax and Estate Planning, Invesco Canada

Originally published in Advisor's Edge Report

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