A trust is not a legal entity, but rather the expression of a relationship where legal ownership of property is in the hands of a trustee, and beneficial entitlement lies with the trust’s beneficiaries. Still, a trust is a taxable entity – so where should it be taxed?
Prior to 2012, it was not uncommon to hear it suggested that a trust is resident where the trustee is resident. Assuming this to be correct, a settlor of a trust could potentially achieve tax savings merely by appointing a trustee in a favourable jurisdiction.
SCC clarifies trust residency
Then came the Supreme Court of Canada (SCC) in Fundy Settlement. In that case, Canada sought tax jurisdiction over a trust with almost half a billion dollars of capital gains, Canadian-resident beneficiaries and a trustee resident in Barbados. It probably goes without saying that the Barbados tax system was much more generous to the taxpayer.
The SCC ruled that there is no legal rule that the residence of a trust invariably must be the residence of the trustee. Instead, the court held that, akin to corporations, residence should be determined based on where the central management and control of the trust actually takes place. On the facts, it was ruled that the purported trustee was simply directed from Canada.
While the substance of Fundy Settlement addressed jurisdiction between two sovereign nations, the principles apply similarly at a sub-national or inter-provincial level. This past June, a judgment from Newfoundland and Labrador took guidance from this earlier case, though coming to a much different result for the trust taxpayer.
From Newfoundland to Alberta
In 1987, Craig Dobbin founded CHC Helicopter Corporation, a transportation company servicing the oil and gas industry in Canada and abroad.
The business was very successful, sufficiently so that in 2002 an estate freeze was implemented, a central component of which was a transfer of shares into the newly settled “Discovery Trust”. The beneficiaries and trustees were Mr. Dobbin’s five adult children, most or all of whom were residents of Newfoundland and Labrador.
In 2006 the trust was amended, including appointment of a successor trustee Royal Trust (RT), a corporation resident in Alberta. Mr. Dobbin had been experiencing health issues at that time, and died later that year. From his death through 2008 a series of transactions were undertaken to wind up the corporate interests held by the estate. RT filed its 2008 trust tax return as a resident of Alberta.
In 2012, the Canada Revenue Agency reassessed the trust as being resident in Newfoundland, calculating the shortfall of provincial tax at $8.8 million, plus arrears interest of almost $1.5 million. The trust appealed the reassessment to court.
Improper tax motivation?
CRA’s position was that the Dobbin children made all trust decisions, instructing RT which merely served an administrative function. The principle investigator’s report went so far as to conclude that RT was appointed “solely” to resituate the trust to Alberta.
This last point the judge considered to be irrelevant. Referring to the oft-cited 1936 case of the Duke of Westminster, it is a person’s right to order affairs to reduce taxes. It was Mr. Dobbins’ prerogative to amend the trust as he did, intentionally bringing it under Alberta tax jurisdiction.
Still, there remained the matter of whether Royal Trust factually exercised central management and control. After reviewing the material transactions, the judge concluded that it had fulfilled its obligations. Though some documents and processes were initiated by others, RT acted independently in reviewing all transactions in order to make informed decisions that protected the best interests of the beneficiaries.
As to the assertion that the taxpayer had an improper tax motivation, the judge found on the contrary that the investigator’s negative view compromised the integrity of the review and in turn the foundation for the reassessment.