Assimilation of Company and Trust ‘Residency’ Confirmed.

As expected the Supreme Court of Canada has upheld the Lower House decision in Fundy Settlement v. Canada that for tax purposes the residency of an offshore trust is not necessarily that of its trustees. Rather, as is the case with companies, residency is established where the actual control of the trust assets is exercised.

In Fundy Settlement the Court found that the two Canadian settlors of the trust were the persons who, in fact, exercised control and management of the trust assets and not the offshore trustees. As a consequence the residency of the trust was Canada and that country’s capital gains tax could be levied on $450m profit realised by the trustees on the sale of the shares of the holding company.

Key Take-Away

The Court did not attack offshore trusts per se and contrary to the view of some commentators this case does not signal the death-knell for offshore trusts settled by Canadian residents. Offshore trusts continue to be a useful and legitimate means of asset protection.

Importantly, however, the settlor must effectively transfer control of the trust assets to the foreign trustees so that they can be legally shielded from onshore tax.

For the full Fundy Settlement decision:

http://scc.lexum.org/en/2012/2012scc14/2012scc14.html

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