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Tax authorities of Canada has won a tax dispute

08.06.2012 The Supreme Court of Canada made judgment about the legality of the transfer tax by the Canadian company assets in a trust which was established in Barbados.

The Canadian company has transferred to a trust established by a resident of Barbados, assets worth 450 million dollars, while paying a tax of 152 million dollars in Canada.

When the trustee sought return of the withheld amount based on an exemption from capital gains tax in the Canada-Barbados Tax Treaty, under which tax is payable only in the country in which the seller is resident. The trustee claimed that because it was resident in Barbados, the trusts were also resident in Barbados.

As a result this case came to the Supreme Court of Canada, which made the judgment in favor of tax authorities in Canada. The trial judge found that the Barbados corporate trustee, an entity owned by an accounting firm, was selected merely to provide administrative services. Its role was to execute documents as required. It was generally not expected that the corporate trustee would have responsibility for decision-making beyond that. Although the accounting firm had significant expertise in accounting and tax matters, it was questionable whether it had expertise in managing trust assets. The beneficiaries of the trust exercised actual management and control in Canada.

Hence, the trust was resident in Canada for tax purposes. The Supreme Court confirmed the trust to be resident in Canada.

This decision created a precedent which could have significant consequences for the persons using such schemes of tax optimization.

Expert’s opinion

Indeed the use of trusts for wealthy and high net worth individuals is a unique opportunity not only to save on taxes, because the trusts are not taxed, but also to preserve their assets.

Moreover, trusts is an excellent heritable planning tool that allows to leave even for unborn children their savings and provides them with a comfortable old age.

Nevertheless, this precedent case in Canada shows an another side, when the trust was established with disabilities: trust Company had no right to manage the trust, because did not have a license for this kind of trust and professional managers, who can correctly and following the business customs, increase the assets of the beneficiary.

When you create a trust it is very important to determine not only the jurisdiction but with the trust manager. Otherwise it turns out that the avaricious pays twice!

On the basis: http://www.financialpost.com

Lomakina Irina ( the Director of Moscow office of Honest & Bright )

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