Interprovincial Tax Planning Using Trusts Upheld

Tax planning aimed at making a trust resident in Alberta in order to take advantage of that province’s lower provincial income tax has been validated in Discovery Trust v. Canada (National Revenue) (2015 CanLII 34016), a decision of the ­Supreme Court of Newfoundland and Labrador, trial division. The court held that the trust (Discovery Trust) was resident in Alberta on the basis that the professional trustee was resident there and had final control over the management of trust property; although requests were made to the trustee by the trust beneficiaries (who were all residents of Newfoundland) and their advisers, the trustee acted only after performing its own due diligence with respect to these requests.

As set out in Fundy Settlement v. Canada (2012 SCC 14), the residence of a trust for tax purposes is determined in accordance with the central management and control test, which looks at where the “real business” of the trust is carried on. Thus, the issue in Discovery Trust was whether central management and control was exercised by the beneficiaries and their advisers (in which case the trust would be resident in Newfoundland) or whether central management and control was exercised by the trustee (in which case the trust would be resident in Alberta).

The CRA’s position paper supporting the reassessment viewed the trustee as passive: “The only function(s) that [the trustee] engaged in for Discovery Trust was administrative in nature and mostly limited to the signing of documents” (paragraph 25). Indeed, the trustee generally accommodated requests made by the beneficiaries and their representatives. However, the court’s analysis of several material transactions showed that the trustee always conducted its own analysis of whether the transactions requested by the beneficiaries would in fact benefit them. Legal issues in implementing transactions were identified, and amendments were suggested (for example, those noted at paragraph 34). The trustee obtained sufficient background information to make an informed decision.

In the court’s view, as long as these processes are carried out, acquiescing to requests from beneficiaries does not amount to delegation of management and control. Different views (between the trustee and the beneficiaries) “can co-exist, even be in conflict as independent positions, without engaging in a diminution of the Trustee’s authority” (paragraph 47). Thus, trustees may receive and grant requests by beneficiaries in respect of transactions involving trust property without tainting the residence of the trust as long as proper processes are in place to ensure that the trustees fulfill their obligations under the trust deed.

A second issue in the case was the CRA’s consideration of the tax motives behind the trust’s residence. The court held that although the purpose and motivation of the Discovery Trust’s residence in Alberta was to obtain tax benefits, the minister’s investigation improperly focused on the economic realities of the situation instead of applying the clear and unambiguous provisions of the Act to the legal transactions being reviewed. In effect, the minister’s investigation ignored the principle that a taxpayer is generally permitted to organize its affairs in a manner that minimizes taxes payable. Thus, the court’s conclusion was that the minister may not reassess on the basis of perceived improper tax motives in respect of trust residence unless the GAAR provisions of the Act are used, and relying on such considerations in an investigation and report can compromise the findings of the investigation.

Colin Poon
Borden Ladner Gervais LLP, Calgary
[email protected]

Canadian Tax Focus
Volume 5, Number 3, August 2015
©2015, Canadian Tax Foundation