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.