Residence of a Trust

The Supreme Court of Canada recently ruled that, for income tax purposes, a trust (like a corporation) resides where its central control and management is located.  This case is referred to as Fundy Settlement.  Prior to Fundy Settlement, the leading case (Thibodeau) held that a trust is resident where a majority of the trustees reside. 

After Fundy Settlement, it is clear the taxation authorities and the court will not accept the residence of the majority of the trustees as being determinative.  The taxation authorities and the courts will want to know where the central control and management of the trust is located.  If the trustees of the trust administer the trust and follow instructions from a beneficiary, a protector, a settlor, or some other non-trustee, then the taxation authorities and the courts will likely find that the trust is resident where the central controller or manager is located. 

Therefore, in order to avoid unwanted surprises, it is important that trustees exercise independent authority, make their own executive decisions, and exercise their own discretion without improper influence from non-trustees such as beneficiaries, protectors, settlors or others.  It is important that the trust be drafted with clarity and certainty as to what factors trustees are to take into account in exercising their discretion.  A settlor who creates a discretionary trust, but does not intend to be regarded as the central controller and manager of the trust, may wish to provide greater detail and direction in the original trust document in recognition of the fact that others will have to interpret and apply the trust terms without further involvement by the settlor.

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