In Herman Grad 2000 Family Trust v. Ontario (Minister of Revenue) 2016 ONSC 2402, the taxpayer appellants were two investment trusts: the Herman Grad 2000 Family Trust (the family trust), and the Marya Grad Spousal Trust (the spousal trust).
For various taxation years between 2006 and 2009, the Minister of National Revenue reassessed the appellants as residents of Ontario pursuant to the Income Tax Act (Ontario) and the Taxation Act (Ontario). The appellants appealed on the basis that they were residents of Alberta during the relevant years. Justice Herman Wilton-Siegel of the Ontario Superior Court of Justice dismissed the appeal. Of key importance in the decision was the fact that the residency of an investment trust is determined by where the decisions with respect to the investment of its assets and distributions to its beneficiaries are made.
The two trustees of the appellants were lawyers practising in Alberta (the trustees). Herman Grad, an Ontario resident, was a beneficiary of the family trust and the settlor of the spousal trust. Grad was also the CEO and the sole director of a number of companies whose shares formed the core of the assets held by the appellants (the Grad group of companies). Jeff Handelsman was the CFO of the Grad group of companies.
The Minister of Revenue argued that, at all relevant times: (1) the trustees were nominees of Grad acting on his direction; (2) all decisions regarding the appellants were made directly or indirectly by Grad; (3) the trustees provided only administrative services based on instructions and directions received directly or indirectly from Grad; and (4) the investment activities of the appellants were directly and indirectly conducted by Grad or by Handelsman, qua CFO of the Grad group of companies. Based on the foregoing, the minister argued that the management of the appellants was conducted in Ontario, making the appellants resident in Ontario.
The appellants argued that, among other things, (1) the decision in Discovery Trust (Trustee of) v. Canada (MNR) 2015 NLTD (G) 86, established that the independence of trustees is maintained by their review of any particular transaction, acquiring an explanation sufficient that an informed decision can be made, and ensuring that the decision has no negative consequence and is in the best interests of the beneficiaries - and that this process was followed in the appellants' case.
Furthermore, the appellants argued that (2) the appointment of trustees with little investment experience to a trust that requires the trust property to be invested is not a significant factor in determining residence, and (3) the trustees were experienced and qualified trustees who were aware of their fiduciary obligations to the beneficiaries of the appellants.
In rejecting the appellants' arguments, Justice Wilton-Siegel invoked the principle that a trust is resident where its "central management and control" actually takes place: Fundy Settlement v. Canada 2012 SCC 14, 1 S.C.R. 520, at para. 15 (Fundy), affirming St. Michael Trust Corp., as Trustee of the Fundy Settlement v. Canada 2010 FCA 309, 2 F.C.R. 374 (St. Michael). This analysis requires the court to examine who, in reality, is exercising the discretionary powers regarding the management and control of the trust property vested in the trustee by the trust deed. These relevant powers and discretions are those regarding the management and control of the trust property, as opposed to more incidental, administrative decisions.
Justice Wilton-Siegel held that the principal decisions which demonstrate management and control of an investment trust pertain to the investment of its assets and distributions to its beneficiaries. For the appellants, these powers were exercised primarily by Grad and Handelsman, and not the trustees, during the relevant years. The trustees' decision-making powers were limited to certain administrative decisions pertaining to audits, tax compliance and professional fees. Moreover, the failure of the trustees to keep internal memoranda or notes relating to their purported execution of investment decisions led to an inference that the trustees did not make independently informed decisions in respect of a number of significant matters and thus did not maintain the independence contemplated in the Discovery Trust case.
Justice Wilton-Siegel acknowledged that management and control of an investment trust may rest with a trustee who has little investment experience provided that the trustee has the power to retain others for advice and remains the ultimate decision-maker. However, where such a trustee chooses to retain an investment manager, the trustee must be able to demonstrate active supervision over the investment manager and should be able to offer written evidence that she made independently informed decisions in respect of the trust property.
It is interesting to note that, in paragraph 81 of the decision, Justice Wilton-Siegel framed the test for a trust's factual residency as a question of where the person exercising management and control of the trust resides. In paragraph 62 of St. Michael, cited by Justice Wilton-Siegel, the Federal Court of Appeal held that, "[...][w]here a question arises as to the residence of a trust [[...]] it is appropriate to undertake a fact driven analysis with a view to determining the place where the central management and control of the trust is actually exercised."
In paragraph 15 of Fundy, the Supreme Court of Canada stated the following: "[[...]], residence of a trust should be determined by the principle that a trust resides [[...]] where the central management and control of the trust actually takes place [[...]] This is not to say that the residence of a trust can never be the residence of the trustee. The residence of the trustee will also be the residence of the trust where the trustee carries out the central management and control of the trust, and these duties are performed where the trustee is resident. "
The discrepancy between Justice Wilton-Siegel's formulation of the test for a trust's residency and that set out in St. Michael's and Fundy may be significant. Quaere if Justice Wilton-Siegel's formulation of this test would be appropriate for a trust which makes decisions by a simple majority of three trustees who are resident in different jurisdictions or for a trust which makes decisions requiring unanimity among two trustees who are both resident in different jurisdictions.
About the authors
Robert Santia is an associate with Aird & Berlis LLP.
Pavle Levkovic is an associate with Glaholt LLP.