RESIDENCY OF A TRUST – A QUESTION OF MANAGEMENT AND CONTROL II: A View from the CRA Bridge!


Written on February 9, 2016 – 7:00 am | by Steven Frye

Last fall I wrote about the Supreme Court of Newfoundland and Labrador being asked to rule on the specific issue of residency which would have significant tax implications to the trust depending on the Court’s determination.

In Discovery Trust vs Canada (National Revenue), 201201G6615, at issue was whether a trust was a resident of Newfoundland and Labrador where the beneficiaries resided or in Alberta where the trustee was a resident. At stake was a very significant amount of additional tax and arrears interest if the residency was ruled to be in Newfoundland and Labrador.

The Canada Revenue Agency (“CRA”) argued that the beneficiaries still had control over the trust and thus the trust remained a resident of Newfoundland and Labrador as the Trustee only performed administrative tasks. For reasons related to trustee independence and authority, The Court determined that central management and control (“CMC”) was with the trustee, thus the residence of the trust was deemed to be in Alberta, being the residence of the trustee.

With reference to this case and others, the CRA was asked at a recent roundtable conference for its views regarding the application of the CMC test in establishing the residency of a trust for provincial income tax purposes.

The CRA confirmed that its view regarding the application of the central management and control test in establishing the residence of a trust for provincial income tax purposes has not changed in light of the recent decisions. The CRA extracted the following from courts decisions as being indicative as to how the CMC test applies in a trust context:

• “(Location of) substantive decisions respecting the trusts, either directly or indirectly through advisers that they directed”
• “Where a trust keeps house and does business, i.e. where the power and discretion of the trustee are really being exercised.”
• “Where its real business is carried on”, “which is where the central management and control of the trust actually takes place.”

The CRA made reference to case law on the meaning of the test in a corporate context which supports that central management and control encompasses the concept of high-level, strategic decision making and governance rather than day to day functions such as practical business management.

In the CRA’s view, that fact that a trustee discharges their administrative and fiduciary obligations does not necessarily lead to the conclusion that the trustee exercises the level of substantive decision making that meets the central management and control test.

The CRA noted that the determination of the location in which the central management and control of a trust takes place continues to be a question of fact. Relevant factors may include, for example, whether the beneficial interests therein are closely held such as in a personal or family trust arrangement in which the beneficiaries or the settlor might be in a position to exercise management and control over the trust, or are widely held by members of the public such that the trustee does in fact have management and control over the trust.

Happy Reading

Tags: , , , , , ,

Survival Skills: Testamentary Style


Written on February 8, 2016 – 5:37 am | by Elaine Blades

A couple of months ago I discussed the purpose of the “30 day survivorship clause” in Wills.  In a nutshell, the clause is designed to address the problems that may arise in the situation where the testator and one or more beneficiaries die in a common accident or otherwise within a short period of time of each other.  By requiring a beneficiary to survive the testator by the specified period of time, the clause also covers situations where it is uncertain who died first.

But what happens in the case of simultaneous deaths where there’s an intestacy or where the Will does not contain a survivorship clause?

Legislation in each province sets out the default rules for determining the order of death in situations where two people die at the same time or in circumstances where it is uncertain who survived the other.

Two possible rules apply, depending on the province.  In Ontario the rule is that each is deemed to survive the other.  B.C., Alberta, Saskatchewan, Manitoba, Quebec and New Brunswick follow the same rule.  In the remaining provinces the youngest survives the older rule applies.  A brief example of how this works:

Bill (age 39) is married to Kate (age 41).  They have no children.  Both have assets in their own name.  In their respective Wills they leave everything to each other in the first instance.  Bill’s Will says that if Kate predeceases him, his estate goes to his mother.  Kate’s Will says that if Bill predeceases her, her estate goes to her brother and sister.  Bill and Kate perish in an avalanche and it’s uncertain who died first.

If the couple lived in Ontario, each estate would be probated and distributed as follows:  the residue of Bill’s estate would go to his mother and the residue of Kate’s estate would be paid to her siblings.  If the couple lived in Nova Scotia – a youngest survives the oldest province – the result woud be very different.  Kate the elder’s estate would be probated and the proceeds paid to Bill the younger’s estate.  Bill’s estate, including the proceeds from Kate’s estate, would be probated and the proceeds paid to his mother.

There’s one more twist to consider.  Four provinces have introduced statutory survivorship rules.  In B.C. and Saskatchewan the beneficiary must survive the testator by five days in order to inherit.  In New Brunswick the survivorship period is 10 days.  Manitoba provides for 15 days.  So, let’s say the couple lived in B.C. and Kate survived Bill by six days.  Her estate would inherit from Bill and the combined estates would be paid to her siblings.   Bill’s mom would miss the cut by a couple of days.

As the examples show, the arbitrary statutory defaults won’t always result in the fairest or most cost efficient distribution or reflect the wishes of the testator.  The best advice is to oust the arbitrary defaults by including a reasonable survivorship provision in your Will.

Gong Hey Fat Choy (or Gong Xi Fa Cai)!  Best wishes to all for a wonderful year of the Monkey!