Date set for Canadian St Michael Trust Corp showdown

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Date set for Canadian St Michael Trust Corp showdown

canada.jpg

The Supreme Court of Canada is preparing itself for a March 13 hearing of the St Michael Trust Corp dispute on the tax residence of a trust.

$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.

more across site & shared bottom lb ros

More from across our site

The US president also unveiled a new 50% levy on copper imports; in other news, a UK wealth tax proposal has been criticised by the Institute for Fiscal Studies
Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Rafael Tena tells ITR about the ‘crazy’ Mexican market, ditching the hourly rate, and refusing to grow his fledgling firm in an ‘unstructured way’
It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
Gift this article