Trusts are used in financial and estate planning because they enjoy special treatment under our income tax law. The use of trusts can result in significant tax savings, savings that can be even greater when combined with another jurisdiction’s preferential tax rates. However, two recent decisions of the Tax Court of Canada may impact the validity and residence of existing trusts and the manner in which future trusts are created.

Residence of a Trust:

The Canada Revenue Agency has long maintained that a trust or estate is resident in the jurisdiction where the trustee who manages and controls it resides. However, this “management and control” test was rejected in Thibodeau Family Trust v. The Queen, which, many believed, held that this test was not generally applicable to trusts. As a result, the prevailing belief amongst tax planners was that a trust was resident where the majority of its trustees resided. In an effort to minimize tax for their clients, some tax planners residence-shopped for the jurisdiction with the most favourable tax treatment. A recent decision of the Tax Court of Canada may have changed the effectiveness of this practice.

In the 2009 case of Garron Family Trust, et al. v. The Queen, the Court held that Thibodeau was insufficient authority to oust the central management and control test for trusts. Canada Revenue Agency’s “management and control” test stood. In determining where the management and control of a trust resided, the Court considered many factors, including: the purpose of the trust; the taxpayer’s ability to replace the trustee; the intention of the parties, and the trustee’s lack of investment expertise. The Court stated unequivocally that a trustee must provide more than “administrative services” in order for the trust to be deemed resident in the trustee’s jurisdiction.

So is your Alberta trust really an Alberta trust after all? Is your offshore trust really “managed and controlled” offshore? Better have another look.

Formation of a Trust:

The crackdown on complacency continued in the 2009 case of  Antle et al. v. The Queen, where the Court denied the very existence of the trust. The case underlined the importance of crossing all the I’s and dotting all the T’s in the formation and maintenance of a trust. In order to create a trust the three certainties (intention to create a trust, clear identification of property subject to the trust, and identified or ascertainable beneficiaries) must be present. If any one of the certainties is not present there is no trust. In rejecting the existence of the trust, the Court in Antle looked at the actual conduct of the parties and not just the trust documentation to determine whether the certainties were present.  As Justice Miller stated,

This conclusion emphasizes how important it is, in implementing strategies with no purpose other than avoidance of tax, that meticulous and scrupulous regard be had to timing and execution. Backdating of documents, fuzzy intentions, lack of transfer documents, lack of discretion, lack of commercial purpose, delivery of signed documents distributing capital from the trust prior to its purported settlement, all frankly miss the mark – by a long shot. They leave an impression of elaborate window dressing. In short, if you are going to play the avoidance game, it is not enough to have brilliant strategy, you must have brilliant execution.

The cases are clear - the burden of proof is on the tax payer to demonstrate the existence and method of management of the trust through intention and actual conduct – reliance on the written documentation, and even worse, on sloppily drafted or poorly executed documentation, will not suffice.

In light of these recent decisions, many experienced legal practitioners will be reviewing their clients’ existing trust structures. If you have an existing trust, it may be advisable to review it in light of these interpretive changes to ensure that the manner in which it has been established will continue to affect your desired result.

At the time this article was written, Nicole Allen was an Associate lawyer of BrazeauSeller.LLP and a part of its Wills, Estates and Tax Planning Group.  If you have any questions about this article, another member of that Group, Don Brazeau, will be pleased to asist you.  He can be reached at dbrazeau@brazeauseller.com.