Fundy Settlement v. Canada

Myron Garron and Andrew Dunin established a trust in Ontario, Canada, and selected a corporate trustee that was incorporated in Barbados. The trustee sold the shares of the holding company at a profit of $ 450 million and claimed that the profits were not subject to the Canadian Capital Gains Tax because the trust was located in Barbados and not Canada. 

In Fundy Settlement v. Canada, the trial court held that the trust was a resident of Canada; therefore, it was subject to the capital gains income tax. The court determined that the trust was a resident because most of its management decisions came from the two Canadian settlors. The court also determined that, in actuality, the trustee was not responsible for the trust. The Federal Court of Canada upheld this decision, and the government appealed to the Supreme Court of Canada. 

The Supreme Court upheld the decision of lower courts, and argued that the Income Tax Act supported this proposition. Namely, the Court reasoned that trusts are similar to corporations, and the tests that determine the residency of a corporation should  apply to trusts. For residency purposes, a corporation is a citizen of the country or state where the company controls its business. Because the two business men controlled the trust from Canada, the trust must also be a Canadian citizen. The court also acknowledged that there is an exception to this rule, but it does not apply in this case. This rule does not apply to people who have only an administrative role in the trust.

There are a few things to take away from this case. First, it is still a good idea to use trusts to minimize Canadian estate taxes; however, the trustee must actually have control over the trust if a taxpayer places his assets in a foreign trust. Second, this only applies for tax purposes.

See Stan Rule, Fundy Settlement v. Canada, Rule of Law: British Columbia Wills, Trusts and Estates Law, Elder Law and Estate Litigation, Apr. 12, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.