In Canada, the principal basis for imposing income tax is residency. As residency has legal and tax implications, it is an important consideration when appointing an individual or entity to act as a Trustee or Estate Trustee. Where a Trustee or Estate Trustee resides in a different jurisdiction from where the assets of the Trust or Estate are held, the question as to which location should be recognized as the residence for tax purposes arises.

The test used in determining the residence of a trustee (or estate trustee) is inextricably tied to that used to ascertain the residence of an estate or trust. The Supreme Court of Canada (the “SCC”) in Fundy Settlement v Canada, 2012 SCC 14, CanLII considered the issue. It decided that the residence of a trust should be determined by the principle that a trust resides, for the purposes of the Income Tax Act, where its real business is carried on, i.e. where the central management and control of the trust actually takes place. Pursuant to subsection 104(1) of the Income Tax Act, the same considerations apply to estate trustees and estates as to a trustee and trusts. 

The SCC agreed with the reasoning of the Minister for National Revenue whose position was that although the trustee, St. Michael Trust Corp., was resident in Barbados, the two trusts it was responsible for, the Fundy Settlement and the Summers Settlement, were resident in Canada because the central management and control of the trusts was carried out by the beneficiaries, who were resident in Canada. St. Michael’s role as the trustee was limited to providing only administrative services.

The established test for the residency of a corporation, being the location of its central management and control, has been extended to the issue of the residence of a trust or estate.  The SCC’s justification for the adoption and application of the test of residency for a corporation to trusts and estates is the many similarities between a trust and corporation, including that they both typically hold assets that need to be managed; they can both involve the acquisition and disposition of assets, and they may both require banking and financial arrangements, amongst others. 

It is often but not always the case that the residence of a trust or an estate is consistent with the residence of the trustee. Such determination is, for tax purposes, primarily a question of fact that is based on the common law rules applicable to individuals. Those common law rules for individuals include the consideration of facts such as having a home in Canada, nationality, physical presence, spouse and dependents in Canada, and social connections, among others, in determining residence for taxation purposes. Those rules notwithstanding, the central management and control test takes precedence when determining the residence of an estate trustee.

The policy reason in applying the residency test in this manner was, as explained by Professor Verna Krishna in The Fundamentals of Income Tax Law (2009), to ensure that a person (or entity) who enjoys the legal, political, and economic benefits of associating with his or her place of residence (in this instance, Canada) will pay their appropriate share for the costs of this association.

The residence of the trustee will also be the residence of the trust where the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident.

Thanks for reading!
Ian Hull and Chigozie Enwereuzo, student-at-law

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