In Discovery Trust v. Minister of National Revenue, 2015 NLTD(G)86, the Newfoundland Supreme Court issued Canada’s first decision involving the provincial residency of a trust. This is also the first decision to apply the test for trust residency articulated by the Supreme Court of Canada in St. Michael Trust, 2012 SCC 14. In applying this test (which states that a trust is resident where its “central management and control” is located), the Newfoundland Court recognized the reality of the trust relationship. It was not prepared to find that the trustee gave up management and control in the context of a fairly typical case where the trustee appears to have discharged its duties prudently and in accordance with its fiduciary obligations and commercial reality.
The trust in this case, the Discovery Trust, was settled in 2002 by Craig Dobbin, founder of CHC Helicopter Corporation (CHC). Mr. Dobbin’s children were the initial beneficiaries and trustees of Discovery Trust. Following its formation, Discovery Trust acquired shares of Discovery Helicopters Inc. (DHI), the holding corporation for the Dobbin family’s shares of CHC.
In 2006, prior to Mr. Dobbin passing away, the Dobbin children were replaced as trustees by the Alberta office of Royal Trust Corporation of Canada (Royal Trust Corp). Two years later, CHC was sold. The proceeds of the sale (which were received by DHI) were distributed to Discovery Trust by way of dividends on the DHI shares and a redemption of DHI shares. Following the execution of a request for distribution by the Dobbin children, Discovery Trust disbursed the trust capital to them. In filing its tax return for 2008, Discovery Trust took the position it was resident of Alberta. By filing as a resident of Alberta rather than Newfoundland, Discovery Trust saved approximately $9 million in tax in 2008.
Following an audit that the Court found was driven by the auditor’s perception that emigrating Discovery Trust to Alberta was abusive (more on this below), the Canada Revenue Agency (CRA) reassessed Discovery Trust on the basis that it was resident, and therefore taxable on the gain, in Newfoundland. The CRA claimed that the “management and control” (and therefore residence) of Discovery Trust continued to be exercised by the Dobbin children in Newfoundland, even after Royal Trust Corp became the trustee in 2006: the beneficiaries (or their advisors) continued to make all the decisions relating to transactions concerning, investments of, and distributions from Discovery Trust, while Royal Trust Corp only performed administrative tasks.
The Court vacated the reassessment on the basis that Discovery Trust was resident in Alberta, as claimed by the appellant. The Court analyzed the residency issue by examining each action taken by Discovery Trust from the perspective of management and control. In so doing, the Court adopted a view of the trustee’s role that is consistent with commercial reality and common trust relationships. For example, the Court acknowledged that the expected level of activity by a trustee will depend on the nature of the particular trust.
In the course of reviewing the relevant transactions undertaken by Discovery Trust, the Court made the following observations:
- Informed consent by a trustee (to a transaction driven by another person) is not tantamount to submission by the trustee to the direction of the other person. As the Court states, “[i]ndependence of the Trustee is maintained by its review of the transaction, acquiring explanation sufficient that an informed decision can be made, ensuring the decision has no negative consequence and is in the best interest of the beneficiaries.”
- A document executed by the beneficiaries requesting an encroachment of the trust’s capital (effectively requesting that funds from the sale of CHC be disbursed to them) did not conflict with the trustee’s independent exercise of their authority. The Court observed that it is “not unusual” for the trustee to require such a written request to formally indicate the beneficiaries’ desire to take funds out of the trust before making a distribution.
- Acquiescence to a beneficiary’s request does not mean that the trustee has given up management and control to the person making the request. In this case, Royal Trust Corp agreed to the beneficiaries’ request to hold back estimated tax on the disbursement of funds, rather than 25% as Royal Trust Corp had initially proposed.
- A trustee cannot always be expected to know the value of the trust’s investments. In this case, the value of the DHI shares was entirely dependent on the value of the CHC shares. The Court observed that “operational knowledge of CHC is not in the Trustee’s possession of control.” As a result, the Court did not consider this issue relevant to whether there was an infringement on Royal Trust Corp’s authority to manage and control Discovery Trust.
- Consultation with a beneficiary regarding a decision to be made by the trustee does not constitute a delegation of authority or responsibility by the trustee. In this case, Royal Trust Corp and one of the beneficiary’s advisors discussed the short-term investment of the holdback for taxes from the CHC sale proceeds.
In addition to dealing with the substantive matters raised by the reassessment, the judge had harsh words about the audit that led to the reassessment. In particular, the judge found that the outcome of the audit was essentially a foregone conclusion as it was conducted with an “overall negative view of the motive for minimization of tax.” The judge concluded that this “improper motive entered the discernment process and compromised in an apparent manner the integrity of an independent rationale for the findings upon which the reassessment could be based.”
In making these comments, the Court reminded tax authorities of the basic Duke of Westminster principle: taxpayers have the right to order their affairs as they see fit to minimize tax payable. The tax authority’s views as to the “morality” of tax planning should not enter into and dictate the result of the audit process.