The Minister of Finance (Canada), the Honourable Bill Morneau, presented the Government of Canada’s 2017 Federal Budget (“Budget 2017“) on March 22, 2017. Budget 2017 contains significant proposals to amend the Income Tax Act (Canada) and the Excise Tax Act (Canada) while also providing updates on previously announced tax measures and policies.
Significant Budget 2017 proposals and updates include:
- Investing an additional $523.9 million over five years to prevent tax evasion and improve tax compliance.
- Extending the mutual fund merger rules to “switch” funds and segregated funds.
- Extending base erosion rules to Canadian life insurers with foreign branches.
- Two measures that clarify the timing of recognition of gains and losses on derivatives held on income account.
- Updates on Canada’s participation in the Organisation for Economic Co-operation and Development project on Base Erosion and Profit Shifting.
Our full analysis of selected proposals and tax measures can be found on Fasken.com.
Canadian and provincial income taxes are assessed on worldwide income on the basis of a taxpayer’s residence. Subsection 104(2) of the Income Tax Act (the “Tax Act”) provides that a trust is deemed to be an “individual” for purposes of the Tax Act. Consequently, trusts that are resident in Canada or deemed to be resident in Canada will be taxed on their worldwide income as opposed to only their Canadian source income. Despite the tax implications accompanying a taxpayer’s residency status, the Tax Act provides little in the way of guidance for determining the residency of a trust. As a result, Canadian courts have been tasked with making this determination.
Central Management and Control
In 2009, Garron Family Trust (Trustee of) v. R. changed the long-standing approach to determining the residency of trusts in Canada. The test set out in Garron provides that the residency of a trust is where the central management and control of the trust actually takes place. The court clarified that the assessment into who has central management and control is a question of fact to be examined on a case by case basis. In concluding that the central management and control of the Summersby and Fundy trusts (the “S&F Trusts”) resided with the beneficiaries, the court considered several factors, including:
- Whether the evidence or lack of evidence demonstrated an active or passive role taken by the trustee in its management of the trust;
- The true controlling minds behind investment decisions and management of the S&F Trusts’ assets;
- The use of a protector mechanism to exert control over the trustee;
- The beneficiaries’ demonstrated interest in the trustee’s management of the S&F Trusts;
- The trustee’s expertise in managing trusts; and
- The trustee’s knowledge of the transactions it had been asked to approve.