Trust Residency and Central Management and Control: What Canadian Trustees Need to Know
In Canadian tax law, determining the trust residency and central management and control is critical to understanding where a trust owes its tax obligations. Landmark Supreme Court decisions like Fundy Settlement v. Canada and subsequent cases such as Darmos Family Trust have reshaped how trust residency is interpreted by tax authorities. These cases mark a shift away from relying solely on the trustee’s location and move toward examining where the real control of the trust takes place.
The Evolution of Trust Residency Rules in Canada
Until 2012, trust residency was typically based on where the trustees resided. This changed significantly after the Supreme Court ruling in Fundy Settlement v. Canada, which emphasized the importance of where decisions are made—not just where trustees are based.
Key Facts from Fundy Settlement v. Canada
- The trusts were formally managed by a trustee corporation in Barbados.
- They sold shares in Ontario and were taxed on capital gains in Canada.
- The trustee argued the trusts were non-resident due to their Barbados address.
- The court held that effective control was in Canada, making the trusts resident here.
Understanding Central Management and Control
The court applied a corporate law principle: a trust’s residence is determined by its central management and control, i.e., where strategic decisions about its assets and affairs are made. This means a trust can be taxed in a province—or even a different country—where trustees don’t reside if control is exercised there.
Factors Considered in Determining Central Management
- Who makes key decisions about trust property?
- Where are those individuals located?
- Are trustees making independent decisions or following others’ instructions?
- Are local trustees only administrative in function?
Case Spotlight: Theodoros Darmos Family Trust v. Minister of Finance
This Ontario case examined two trusts that claimed residency in Alberta. Trustees were appointed in Alberta, but the court looked beyond formalities. It found that Mr. Darmos and his Ontario-based advisors directed the key decisions. Thus, central management and control took place in Ontario, not Alberta.
What the Court Found
| Criteria | Finding |
|---|---|
| Trustee location | Primarily Alberta |
| Decision-makers’ location | Ontario |
| Control over trust assets | Exercised by Ontario advisors |
| Final ruling on residency | Ontario |
Implications for Trustees and Taxpayers
Trust creators and advisors must understand that appointing an out-of-province or foreign trustee doesn’t guarantee tax residency elsewhere. What matters most is who is actually controlling the trust.
To Ensure Proper Trust Residency:
- Document all trust decisions clearly and specify who made them.
- Empower trustees to act independently without outside direction.
- Avoid using trustees as “rubber stamps” for settlor or beneficiary preferences.
- Keep professional advisors in the same jurisdiction as intended residency.
Frequently Asked Questions
1. What determines trust residency in Canada?
Trust residency is based on where the trust’s central management and control is exercised, not merely where trustees live.
2. Does appointing a foreign trustee avoid Canadian taxes?
No. If key decisions are made in Canada, the trust may still be considered a Canadian resident for tax purposes.
3. What is central management and control?
It refers to the authority over trust operations, particularly decisions about investments, distributions, and policy-making.
4. Are trustees required to make decisions independently?
Yes. Trustees must exercise independent judgment. If they are simply following orders, the true decision-maker determines residency.
5. How can I structure my trust to avoid double taxation?
Work with legal and tax professionals to ensure residency aligns with management. Proper documentation and jurisdictional planning are essential.
Conclusion
The concept of trust residency and central management and control plays a pivotal role in determining a trust’s tax obligations in Canada. Courts will look at who truly controls the trust—not just where the trustees are located. Whether forming a new trust or managing an existing one, understanding and applying this principle is essential for legal compliance and tax planning. Always consult a tax advisor or legal professional to ensure your trust meets the requirements for its claimed jurisdiction.
