Garron taxpayers fail at Canada’s Supreme Court

16 April 2012

The Canadian taxpayers in the long-running Garron trust residence case have lost their appeal to the federal Supreme Court.

The dispute concerned the management and control of some trusts set up in Barbados, and its implications for their liability to Canadian income tax.

The appellants were two Canadian residents, Dunin and Garron, who jointly owned a Canadian firm called PMPL. They had previously conducted an IFC freeze transaction, so that whenever the firm’s value increased, the capital gains were assigned to new shares held by a second firm, which itself was owned by the Barbados trusts. The beneficiaries of these trusts were Dunin and Garron themselves, and the trustee of both was a licensed trust company resident in Barbados, called St. Michael.

In due course the trusts sold the shares and realised capital gains of C$450 million for Dunin and Garron. They argued that the Canada-Barbados tax treaty exempted these gains from Canadian tax because the trusts were administered in Barbados. Previous Canada Revenue Agency (CRA) practice, based on a court decision called Thibodeau, stated that a trust was resident in the same jurisdiction as its trustee.

But this time the CRA disagreed, claiming that the trusts’ actions were in reality directed by the Canadian beneficiaries, not the Barbados trustee, and that they were thus Canadian resident under common law. As back-up, it also argued for Canadian residence on the basis of a special rule for non-resident trusts (section 94); and if that failed, on the basis of Canada’s general anti-avoidance rule.

Both the Tax Court of Canada (in 2009) and the Federal Appeal Court (in 2010) supported the CRA’s view that the trusts were controlled from Canada and the trustee played a merely clerical role. In doing so, they abandoned the Thibodeau residence criterion and imposed on trusts the central management and control test traditionally used for corporations.

Garron and Dunin refused to accept this and went all the way to the Supreme Court, where they have now lost on the same ground – which, incidentally, leaves the s94 and GAAR arguments untested (Fundy Settlement v Canada, 2012 SCC 14).






Aird Berlis




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