$450 million of capital gains realised by Barbados-constituted trusts are at stake. The Canada Revenue Agency says that the trusts owe Canadian income tax on the gains realised as residents of Canada. Yet, were these trusts resident in Canada or the Barbados? Memoranda of fact and law are filed.
The taxpayer's argument is simple and seductive. The tax residence of a trust should be determined with reference to the residence of the trustee and not based on a central management and control (CMC) test because a trust is not a separate person like a corporation but a legal relationship. The taxpayer asserts that this interpretation is consistent with the language in the Canadian Income Tax Act.
Nonetheless, the Crown won the battles in the two courts below. It argues that Canadian tax law will be consistent and fair if the CMC test is applied to trusts. The CMC test is fact-driven and flexible unlike the arbitrary and rigid interpretation of the taxpayers. The test determines residence correctly, especially if the trustee actually exercises no powers over the trust property. In this case the Crown asserts that the evidentiary record points to two Canadian individual residents having made all substantive decisions relating to dispositions of shares owned by the Barbados trusts. The Crown has acknowledged that the trusts were properly constituted with no allegation of sham-a point argued in other Canadian cases.
The Crown further argues that another statutory anti-avoidance rule (section 94) deemed the trusts to be Canadian residents. In the alternative, the Crown asserts that the Canadian general anti-avoidance rule(GAAR) should be applied to prevent an abusive interpretation of the Canada-Barbados tax convention. Neither of these arguments prevailed in the lower courts. Given the court's GAAR decision in Copthorne on December 16 2011, it is unlikely that new legal principles will emerge in this regard.
No doubt tax advisers around the Commonwealth will be watching with great interest and will be interested in the precedential value of the decision outside of Canada.
Ed Kroft QC (ed.kroft@blakes.com) of Blake, Cassels & Graydon.
