Estates & Trusts Decisions by John Delaney & Ted Crane

Garron Family Trust (Trustee of) v. R.

2009 TCC 450

Tax Court of Canada

Judgment: September 10, 2009

The Tax Court of Canada considered the issue of trust residence in a case that involved a complex reorganization of a holding company of a Canadian corporation that was in the business of manufacturing and assembling parts for the automotive industry.

The reorganization and decision are complicated. The decision should be reviewed for details. Briefly, the reorganization was a freeze that included issuance of newly issued common shares for nominal consideration to newly incorporated Canadian holding companies. Shares in the new holding companies were issued to Trusts for nominal consideration. The newly incorporated holding companies were wholly-owned by the Trusts.

The holding company was sold in an arm’s length transaction and the Trusts disposed of the majority of their shares in capital stock of the newly incorporated holding companies. Capital gains in excess of $450,000,000.00 were realized. The Trusts were assessed for taxes on the gains in 2000.

The Trusts appealed the tax assessments. The Trusts sought an exemption to payment of taxes in accordance with the tax treaty between Canada and Barbados. That decision turned on whether the Trusts were resident in Canada.

The sole Trustee of each Trust was St. Michael Trust Corp., which is incorporated and licensed in Barbados, and regulated by the central bank of Barbados. The terms of the Trust included the appointment of a protector who had the ability to remove and replace the Trustee at any time. The majority of beneficiaries of the Trusts over a certain age had the ability to replace the protector at any time.

The Trusts relied on Thibodeau Family Trust v. The Queen, a 1978 decision of the Federal Court Trial Division. The Trusts argued that Thibodeau stood for the proposition that the residence of the trustee determines the residence of the trust and that since the corporate Trustee of the Trusts was resident in Barbados the Trusts were not residents of Canada for tax purposes.

The Minister of National Revenue argued that the residence of those who have the actual management and control of a trust determines residence of the trust, that Canadian beneficiaries of the Trusts managed and controlled the Trusts and that therefore the appropriate residence of the Trusts was Canada.

After consideration of Thibodeau and a number of other cases the judge concluded that the appropriate judicial test for determining the residence of a trust should be the same test that is used for determining the residence of a corporation, being one of central management and control. The judge further considered what is meant by management and control.

The judge found that the role of the corporate Trustee was limited to providing incidental administrative services and that it did not have decision-making authority. Decision making authority rested with Canadian resident beneficiaries of the Trusts. The judge concluded that the central management and control of the Trust was therefore located in Canada and that the Trusts were resident in Canada.

This decision will have significant and wide reaching impact on how trusts are structured where residence of the trust is at issue, including structuring Alberta resident trusts for tax purposes and structuring Manitoba and Saskatchewan resident trusts for perpetuity purposes.

In addition, the Tax Court of Canada has also released a recent decision in Antle v. The Queen 2009 TCC 465 which considered an attempt by a taxpayer to avoid payment of a capital gain on the sale of shares in a closely held private corporation through the use of a spousal trust created for the purpose of transferring, holding and selling the shares and distributing the proceeds of sale to the spouse. The court found there to be a lack of certainty of subject matter in finding that no trust existed. This case is another significant decision related to trusts and taxation that bears consideration to those practitioners involved with trusts.

This case comment was originally published in “Headnotes and Footnotes”, for the Manitoba Bar Association. It was valid and accurate as of the date it was submitted. © John Delaney 2009.