Tax and Estate Planning Blog : Moodys LLP and SNC Law

On November 17, 2010, the long awaited decision was released by the Federal Court of Appeal (“FCA”) in St. Michael Trust Corp, as Trustee of the Fundy Settlement v. Her Majesty The Queen and St. Michael Trust Corp., as Trustee of the Summersby Settlement v. Her Majesty The Queen (“Garron Family Trust”). 

In its lengthy reasons, the FCA determined that the Tax Court of Canada decision, as outlined in our September 16, 2009 blog, was substantially correct. In particular, the FCA stated “…. that where a question arises as to the residence of a trust for tax purposes, 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.” [See paragraph 62 of the decision]

Accordingly, the FCA has stated, quite strongly, that the central management and control test is the appropriate one to utilize when determining the residence of a trust for tax purposes. The FCA also stated that it is certainly appropriate for trustees to delegate  certain of their responsibilities and retain others for advice. However, at paragraph 68 of the decision, the FCA states the following:

“[68]   However, there is a line to be drawn. On one side of the line are recommendations, even strong ones, by the beneficiaries to the trustee, leaving the trustee free to decide how to exercise the powers and discretions under the trust. In that case, the trustee is still managing and controlling the trust. On the other side of the line the beneficiaries are really exercising the powers and discretions under the trusts, managing and controlling the trusts, and displacing the appointed trustee. As mentioned above, on which side of the line a case falls is a factual question, requiring consideration of the evidence in its totality.”

The above paragraph, in my view, is particularly enlightening and trustees will need to be very careful into the future in order to ensure that the residence of a trust is truly where they intend it to be.

The FCA, unlike the Tax Court, found that section 94 of the Income Tax Act applied to the facts of the case  which would therefore have caused the non-resident trusts to be deemed resident in Canada. The issue at stake was whether or not the so called “contribution test” of section 94 was met if the non-resident trusts in question acquired property “directly or indirectly in any manner whatever” from a Canadian resident beneficiary. Based upon the facts of the case, the Court found that there had in fact been a shift in value from the Canadian resident shareholders to the non-resident trusts at the time the particular transaction occurred to insert the non-resident trusts into the shareholdings of the subject Canadian corporations. The section 94 analysis by the FCA will surely attract the attention of many tax advisors who deal with section 94 on a regular and routine basis.

This decision will no doubt capture the attention of the tax community. Tax advisors and their clients who utilize trusts as a flexible tool for tax and estate planning will need to carefully consider this decision into the future. It will also be interesting to see how this decision attracts the attention of the international tax community given that the community has been anxiously waiting for the FCA’s comments. It will further be interesting to see whether or not the taxpayer seeks leave to the Supreme Court of Canada. Stay tuned … these are interesting times and it is likely that this is not the end of the story. 

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As you may be aware, a US person (US citizen or resident, US partnership, US corporation or US estate or trust) has an obligation to file a Report of Foreign Bank and Financial Account (FBAR) if that person has a financial interest in or signature authority (or comparable authority) in one or more accounts in a foreign country if the aggregate value of those accounts exceeds $10,000 USD at any time during the calendar year. However, what you may not know is that starting with the 2011 tax year under the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) and Internal Revenue Code section 6038D, there is now an additional requirement for an individual who holds an interest in a “specified foreign financial asset” to disclose information on each such asset if the aggregate value of all the individual’s specified foreign financial assets exceeds $50,000 USD. This disclosure is done on a form which will be attached to the individual’s income tax return. In addition, “individual” refers to any US entity which holds directly or indirectly non-US financial assets. Lastly, if the Secretary determines that an individual has an interest in one or more “specified foreign financial assets” but fails to provide sufficient information to determine whether the $50,000 USD threshold has been met, then the aggregate value will be assumed to be greater than the $50,000 USD threshold for purposes of assessing penalties. 

A “specified foreign financial asset” includes any financial account maintained at a non-US financial institution and any of the following assets which are not held in an account at a foreign financial institution: a stock or security issued by a person other than a US person, any financial instrument or contract held for investment that has an issuer or counterparty which is a non-US person and any interest in a foreign entity. The required information that must be disclosed is: (1) the name and address of the financial institution in which the account is maintained and the account number; (2) in the case of a stock or security the name and address of the issuer and other information such that the class or issue of the stock or security can be identified; (3) in the case of another instrument, contract or interest then such information necessary to identify the instrument and names and addresses of any issuers; and (4) the maximum value of the asset during the year. 

Under section 6038D(d), an individual who fails to provide the required information is subject to a $10,000 USD penalty. Moreover, where the failure to disclose continues for more than 90 days after the day on which the Secretary mails notice of such failure, then such person will be subject to a penalty of $10,000 USD for each 30-day period after the expiration of the initial 90-day period. The maximum penalty will be $50,000 USD. However, no penalty will be assessed where the failure to disclose the required information was due to a reasonable cause and not willful neglect. 

Sound familiar? There is much overlap with the new section 6038D reporting requirements and the FBAR reporting already in place. One notable difference is that, as mentioned above, the new reporting requirements under the HIRE Act are attached to an individual’s tax return and sent to the IRS location where the individual files his or her return whereas the FBAR is sent separate from the tax return to a different location from where returns are filed. Additionally, unlike the FBAR, the section 6038D filing requirement would apply to an individual who holds a specified foreign financial asset whether or not he or she has signature authority or other authority over the account. An example of this distinction would be an individual who is a beneficiary of a foreign trust but is not within FBAR reporting requirements because he or she holds less than a 50 percent interest and does not have the specified authority over the account but would still fall under the section 6038D reporting requirements because the $50,000 USD threshold is exceeded. 

The cross-border tax professionals at Moodys LLP would be pleased to comment on your own specific issues regarding this topic.  Please feel free to contact any one of our cross-border tax professionals.  

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