By Andrew Rogerson LL.B (Hons)TEP
STEP Journal – March 2008
The common law of Canada still regards a trust as being resident where the individual trustee resides. This can cause entirely unforeseen results for settlors and testators, in an age of relatively free movement of professionals across national borders. The aim of this article, therefore, is to invoke discussion as to whether a “mind and management” test should replace that of “residence of individual trustee”. Whilst this article attempts to state the law as it prevails in Canada, it is hoped that it may act as a catalyst for discussion in other jurisdictions.
The problem may be felt most acutely in the following scenario. A simple will is executed by a Canadian resident testator appointing a sole individual as executor and trustee. The individual, after taking office, decides to relocate to another country, but returns periodically to attend to his duties as executor and administrator.
All references below are to the Canadian Income Tax Act.
A deceased estate is taxable in Canada if it is a resident of Canada for tax purposes, carries on business in Canada, or disposes of taxable Canadian property, as defined in s248(1). Subsection 104(1) provides that reference to a trust or estate shall be read as a reference to a trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property.
There is no specific provision in the Act defining residence. Since a trust does not have separate legal personality, it is taxable as a natural person (s104(2). The residence of a trust for tax purposes is a question of fact, prima facie determined according to the common law rules applicable to individuals. A trust is generally resident according to the residence of the trustee. See, for example, the Supreme Court decision in M.N.R. v Royal Trust Co., (1928-34) C.T.C. 74, in which the trust had non-resident beneficiaries, but the trustee, who was resident, was taxable. More recently, the Federal Court in Thibodeau v The Queen (1978) C.T.C. 539 affirmed the proposition in the context of multiple trustees living in various countries. The actual decision in Thibodeau was to the effect that the residence of the trust is where the majority of trustees reside, provided that the trust instrument provides for majority decisions. Canadian courts do not accept that a trust may have dual residence (even though it is possible for tax purposes for an individual to have dual residence).
The common law says that, unlike companies, the residence of a trust is not determined by a “central management and control” test. This follows from the basic principle of trust law that trustees cannot delegate any of their authority to co-trustees.
The legislature has made inroads into the common law position, by legislation designed to reduce the attractiveness of offshore trusts. Section 94 may deem a non-resident testamentary discretionary trust to be a resident of Canada if it has Canadian resident beneficial interests, and acquires property from a Canadian resident
Revenue Canada has produced a helpful guide IT-447 entitled “Residence of Trust or Estate” (May 30, 1980) (now available online at http://www.cra-arc.gc.ca/E/pub/tp/it447/it447-e.html ). Generally, this sets out a fair summary of law and practice. It has not been updated to reflect the Hague Convention of the Law applicable to Trusts and their Recognition, which came into force in 1992.
Article 7 thereof provides as follows:
“ Where no applicable law has been chosen, a trust shall be governed by the law with which it is most closely connected.
In ascertaining the law with which a trust is most closely connected reference shall be made in particular to:
- the place of administration of the trust designated by the settlor;
- the situs of the assets of the trust;
- the place of residence or business of the trustee;
- the objects of the trust and the places where they are to be fulfilled”.
Tests (a) (b) and (d) cut right across the common law and could be helpful in arguing that the trust is Canadian resident.
There are hints in IT-447, that Revenue Canada may not always feel constrained by the common law. Paragraphs 5, 6 and 8 state as follows:
5. Normally residence of a trust is dependent upon residence of the trustee or trustees who can exercise management and control of the trust. In some situations the facts may indicate that a substantial portion of the management and control rests with some other person such as the settlor or the beneficiaries. In these situations the residence of this other person may be considered to be the determining factor for the trust regardless of any contrary provisions in the trust agreement.
6. Where an individual exercises the management and control of a trust, the residence of that individual is determined based on the normal factual tests for determining the residence of an individual.
8. In some situations, after examination of all factors, it may be determined that a trust is resident in Canada notwithstanding that another country may consider the trust to be resident in that country.
The above indicate considerable room for argument as to residency. In a modest estate such argument may be disproportionate. Perhaps it may be appropriate to characterize the residence of all trusts in terms of mind and management?
Andrew Rogerson is a Toronto lawyer practicing in the fields of estate planning and asset protection.