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Fundy Settlement v. Canada, 2012 SCC 14, [2012] 1 S.C.R. 520 Case Summary
In the case of Fundy Settlement v. Canada, the Supreme Court of Canada decided that two trusts were considered residents of Canada for tax purposes because their main business decisions were made by beneficiaries living in Canada, even though the trustee was a company based in Barbados. This means the trusts had to pay Canadian taxes on their earnings. The court emphasized that the location where key management and control activities take place determines a trust’s residency, not just the official location of the trustee.
Supreme Court of Canada
Citation: Fundy Settlement v. Canada, 2012 SCC 14, [2012] 1 S.C.R. 520
Date: April 12, 2012
Docket: 34056, 34057
Coram: LeBel, Deschamps, Fish, Abella, Rothstein, Moldaver, and Karakatsanis JJ.
Reasons for Judgment: The Court (paras. 1 to 19)
Appellants: St. Michael Trust Corp., as Trustee of the Fundy Settlement and the Summersby Settlement
Respondent: Her Majesty The Queen
On Appeal From: Federal Court of Appeal
Overview
The principal issue in this case was the determination of the residency of two trusts (the Fundy Settlement and the Summersby Settlement) for Canadian tax purposes. The central question was whether these trusts were resident in Canada, given that their trustee, St. Michael Trust Corp., was a corporation resident in Barbados, while the central management and control of the trusts were exercised by beneficiaries residing in Canada.
Facts
• St. Michael Trust Corp., a corporation resident in Barbados, served as the trustee for the Fundy Settlement and the Summersby Settlement.
• The beneficiaries of the trusts were residents of Canada.
• Upon disposing of shares in two Ontario corporations, significant capital gains were realized, and the purchaser withheld $152 million as Canadian tax.
• St. Michael sought the return of the withheld amount, claiming an exemption under the Canada-Barbados tax treaty, asserting that the trusts were resident in Barbados.
• The Minister of National Revenue contended that the trusts were resident in Canada because their central management and control were conducted by the beneficiaries in Canada.
Legal Issue
Whether the Fundy and Summersby trusts are resident in Canada for taxation purposes, considering the location of their central management and control.
Judicial History
• Tax Court of Canada: The court found the trusts to be resident in Canada.
• Federal Court of Appeal: The court upheld the Tax Court’s decision, affirming the residence of the trusts in Canada.
• Supreme Court of Canada: Leave to appeal was granted.
Decision
Held: The appeals were dismissed.
Reasoning
1. Principle of Residency: The primary basis for imposing income tax in Canada is residency. The Supreme Court affirmed that a trust, similar to a corporation, is resident where its real business is carried on, meaning where its central management and control are exercised.
2. Role of the Trustee: The Court determined that the residence of the trust is not necessarily that of the trustee. A trust resides where the central management and control actually take place, which, in this case, was in Canada.
3. Central Management and Control: The main beneficiaries in Canada exercised the central management and control of the trusts. St. Michael Trust Corp. had a limited administrative role and did not perform substantive management functions.
4. Legal and Policy Considerations: The Court noted the importance of consistency, predictability, and fairness in applying tax laws, aligning the residency determination for trusts with the established principles for corporations.
Conclusion
The Supreme Court of Canada concluded that the Fundy and Summersby trusts were resident in Canada for tax purposes, given that their central management and control were exercised by beneficiaries in Canada. The appeals were dismissed with costs awarded to the respondent.
Implications
This decision underscores the importance of where the central management and control of a trust are exercised in determining its residency for tax purposes. It highlights that the formal residence of the trustee is not the sole factor, emphasizing the practical management and control exercised by the trust’s beneficiaries.
Cited Authorities
• De Beers Consolidated Mines, Ltd. v. Howe, [1906] A.C. 455
• The King v. British Columbia Electric Railway Co., [1945] C.T.C. 162
• Crossley Carpets (Canada) Ltd. v. M.N.R., (1967), 67 D.T.C. 522
• Unit Construction Co. v. Bullock, [1960] A.C. 351
Statutes and Regulations Cited
• Canada-Barbados Income Tax Agreement Act, 1980, S.C. 19808182-83, c. 44, s. 25
• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 2(1), 94, 104(1), (2), 245
Treaties and Other International Instruments
• Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, Can. T.S. 1980 No. 29
Authors Cited
• Krishna, Vern. The Fundamentals of Income Tax Law. Toronto: Carswell, 2009.
Solicitors
• For the Appellants: Douglas H. Mathew, Matthew G. Williams, and Mark A. Barbour, Thorsteinssons, Toronto.
• For the Respondent: Anne M. Turley and Daniel Bourgeois, Attorney General of Canada, Ottawa.
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