Mind and management test of De Beers now applies to Trusts

Last night at my daughters’ confirmation I met up with two classmates from Queen’s Law.  They are both godmothers of the twins.  At Queen’s tax law was a mandatory course during first year and that requirement was very upsetting to one of the godmothers to the extent that she was certain she would fail the course and hounded the other godmother and myself with her fears constantly and during our study sessions.  That tax course of which I have fond memories covered both Thibodeau Family Trust v. The Queen 78 DTC 6376 (FCTD) and De Beers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455.  These cases were crucial to the determination of the residency of the Garron trust through three levels of courts (Tax Court of Canada, Federal Court of Appeal and finally the Supreme Court of Canada).

The Supreme Court of Canada released their decision on Garron today.  The proper citation for Garron is FundySettlement v. Canada, 2012 SCC 14.  However Garron is how tax practitioners tend to refer to the case. 

The Supreme Court decision followed the Tax Court and the Federal Court of Appeal which both held that the law of Thibodeau Family Trust v. The Queen 78 DTC 6376 (FCTD) no longer applied but that the residency of a trust was determined by the corporate mind and management test of De Beers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455.

The principle behind Thibodeau which all tax law students from my vintage can recite is that the residence of a trust is determined by the residency of the majority of its trustees.  As such tax practitioners always carefully ensured that the trustees resided offshore when establishing an offshore trust. 

On the other hand if one was trying to determine the residency of a corporation then droned into us was the De Beers test.  De Beers essentially states that a corporation residence is determined by the jurisdiction wherein the corporation’s mind and management resides.  This is then determined by the jurisdiction where the corporate board meets.

In Garron all three level of the Courts disregarded the fact of where the trustees of the trust resided and focused instead on the mind and management behind the trust which was found to be in Canada. In essence the trustees were deemed by the Courts to be puppets rubber stamping documents as directed by the controlling mind in Canada.

Garron’s defence that the corporate residency test as found in De Beers should not be applied to a trust as a trust is not a person like a corporation was dismissed by the Supreme Court.  The Court accepted the Minister of National Revenue’s position that for the purposes of the Income Tax Act, the fact that at common law a trust does not have an independent legal existence was irrelevant and cited subsection 104(2) which deems a trust for purposes of the Income Tax Act to be an individual.

The Supreme Court further held that the similarities between a trust and a corporation warranted the application of the central management and control test application to a trust as both a trust and a corporation:

• both hold assets that are required to be managed;
• both involve the acquisition and disposition of assets;
• both require the management of a business;
• both require banking and financial arrangements;
• both may require the instruction of lawyers, accountants and other advisors;
• both may distribute income, corporations by way of dividends and trusts by distributions.

The Supreme Court concluded with Madame Justice Woods of the tax court that indeed “the function of each is, at a basic level, the management of property”.  The Court further concluded with Madame Justice Woods that adopting a similar test for trusts and corporations promotes “the important principles of consistency, predictability and fairness in the application of tax law” and for there to be a totally different test for trusts than for corporation, there should be good reasons for it.  The Supreme Court noted that no good reasons were offered.

This is an exciting case due to the fact that for years – 34 years to be precise, the Thibodeau doctrine governed the determination of where a trust was resident.  Too think that one could have applied the De Beers test would have been considered blasphemy in my first year tax course at Queen’s. Not to worry about the godmother who feared tax law – she managed to score higher than both myself and the other godmother at the exam.