Fundy Settlement v Canada [2012 SCC 14] is a landmark case which used a test in order to put to rest any doubts which Trust Administrators might have in connection to the residence of a Trust for Tax purposes.
The case involved two family trusts settled by an individual resident, in St. Vincent in the Caribbean, for the benefit of Canadian resident beneficiaries. The facts of the case are that the Trustee, a corporation resident in Barbados, disposed of shares which the trusts held in two Ontario corporations. The purchaser remitted some C$152 million to the Minister of National Revenue as withholding tax on account of Canadian tax from capital gains realised by the trusts on the sale of the shares, pursuant to section 116 of the Income Tax Act 1985 (“the Act”).
The Trustee subsequently applied for a refund under the Canadian and Barbados Tax treaty, claiming that the profits were not subject to the Canadian Capital Gains Tax as the trusts were located in Barbados and not Canada. The Canada Revenue Agency (CRA) refused the request for a refund, taking the position that the trusts were resident in Canada and owed Canadian income tax on the capital gain realised on the disposition.
The previous decisions of the Tax Court of Canada and the Federal Court of Appeal were unanimously upheld by The Supreme Court. The outcome of the decision was that the trusts were resident in Canada for the purpose of paying Income Tax.
"The Central Management & Control Test"
In reaching its decision, the Court applied the central management and control test and confirmed that, as with corporations, the residency of a trust should be determined by where the “central management and control” of the trust actually takes place. The Court drew similarities between the trust and a corporation and looked to precedent case law in relation to how the test was applied in the case of corporations.
Facts To Determine Central Management & Control Test
In Fundy Settlement, the following principal facts were considered in determining the “central management and control”:
- The Trustee did not have responsibility for decision-making beyond the execution of documents as required, and the provision of incidental administrative services. In addition, no documentation was provided as evidence that the Trustee played an active role;
- Rather than exercising its powers and discretions under the trust deeds, the Trustee did not exercise its powers and discretions provided under the trust deeds but rather defaulted automatically to the recommendations and decisions of two of the principal beneficiaries, both of whom were resident in Canada;
- The terms of the trusts effectively provided that the Trustee could be replaced by the protector of the trust and a majority of the beneficiaries could replace the protector.
- The trusts and beneficiaries had the same tax and investment advisors;
The Trustee was actually an offshoot of an accounting firm, and had accounting and tax expertise, but it was less specialized in trust management.
Implications Of Fundy Settlement For Trustees
It is clear that Trustees should demonstrate that they exercise their powers to manage and control the trust fund. The role of a Trustee is not to provide mere administrative services and Trustees should not allow beneficiaries, or other persons, to make decisions on behalf of the trust. All paperwork must be retained and it should accurately reflect the decisions made by the Trustee.
This ruling is a landmark case for Trust administrators and with it the Canadian Supreme Court has confirmed that the legal test applicable to determine a trust’s residence for tax purposes is the central management and control test.