December 2nd, 2010.
The Tax Court of Canada (TCC) decision in Garron, now known as St. Michael Trust Corp., was upheld in a recent Federal Court of Appeal (FCA) decision that serves as a warning that residency issues for trusts — and for corporations — should be taken seriously.
The decision concerned the residency of two trusts, and held that similar considerations should apply as are required to determine the residency of a corporation.
The FCA agreed with the TCC’s determination that the trusts at issue were resident in Canada and not Barbados since, among other reasons, the trusts’ real decision makers were their beneficiaries, who were Canadian residents. Therefore, the capital gains realized by the trusts were taxable and not treaty exempt. There is also a lengthy discussion in obiter of other issues in the event the trusts were resident in Barbados, including the application of section 94 of the Income Tax Act, the application of the Canada-Barbados Tax Treaty to exempt the gains and the application of the General Anti-Avoidance Rule (GAAR).
Had residency in Barbados been successfully established for the trusts, the tax planning would have been successful, i.e., the gains would have been exempt under the treaty and the GAAR would not have applied.