On March 20, 2024, the Ontario Superior Court of Justice delivered a significant ruling in the case of the Darmos Family Trust. The court found that two family trusts, ostensibly established in Alberta, were actually deemed as residing in Ontario, due to the location of their central management and control. This decision highlights the critical importance of the concept of “central management and control” in determining the residency of trusts for tax purposes in Canada.
Case Background
The Darmos Family Trusts were created to manage the proceeds from the sale of a company in which Mr. Theodoros Darmos had been a principal figure. The trusts’ assets primarily consisted of shares in corporations holding these investment proceeds. The trusts had three trustees: an Alberta lawyer, an Alberta trust company, and an Ontario-resident lawyer, Mr. Alexopoulos, who had been a long-time legal advisor to Mr. Darmos.
Key Findings
Superior Court Justice Ramsay concluded that the trusts resided in Ontario, not Alberta, despite the involvement of Alberta-based trustees. The pivotal factor was where the central management and control of the trusts occurred. The court’s findings included:
- Role of Ontario-based Individuals:
- Mr. Darmos was actively involved in directing the management of the trust property and the assets of the corporations held by the trusts.
- The Ontario-resident lawyer, Mr. Alexopoulos, played a significant role in dealing with professional advisors and implementing major decisions.
- The trusts’ accountants, KPMG, based in Ontario, made key recommendations regarding distributions.
- Investment management functions were significantly handled by RBC Dominion Securities, to whom Mr. Darmos had delegated substantial authority.
- Limited Role of Alberta-based Trustees:
- The Alberta-based trustees primarily served to implement and document decisions made by others, with no substantial involvement in strategic decision-making.
- Location of Key Activities:
- The court examined where the day-to-day and strategic management of the trusts occurred. Despite the formal trusteeship structure, the substantive control and decision-making was centralized in Ontario.
Implications of the Ruling
Tax Residency of Trusts
The determination of a trust’s residency is crucial, because that dictates the jurisdiction for tax purposes. The central management and control test, which examines where the key management and strategic decisions are made, often overrides the formal location of trustees.
Practical Considerations for Trusts
- Establish Clear Management Structures: Trusts should ensure that their management structures and decision-making processes are clearly documented and aligned with their intended jurisdiction of residence.
- Documentation and Evidence: Maintain comprehensive records demonstrating where and by whom key decisions are made. This includes minutes of meetings, correspondence, and directives from trustees and advisors.
- Engage Local Professionals: To strengthen the position of the intended jurisdiction, consider engaging professional advisors and trustees within that jurisdiction who actively participate in the trust’s management.
- Regular Reviews: Periodically review the trust’s management and control practices to ensure compliance with the desired tax residency status. Adjust practices as necessary to maintain the intended residency.
Broader Impact
The Darmos Family Trust case underscores the importance of substance over form in tax matters. This principle can extend beyond trusts to other entities and arrangements where residency and management control are pivotal. In order to combat tax avoidance and ensure proper compliance, tax authorities in Canada and other jurisdictions are increasingly scrutinizing the substantive activities and management of trusts.
Conclusion
The Ontario Superior Court’s ruling in the Darmos Family Trust case serves as a crucial reminder of the complexities surrounding the determination of tax residency for trusts. For high net worth individuals and their advisors, this case highlights the necessity of thorough planning, robust documentation, and ongoing management practices aligned with the desired jurisdiction of residence. As tax authorities continue to focus on substance over form, understanding and correctly applying the central management and control test is essential for effective tax planning and compliance. Have questions? Reach out to Cardinal Point Wealth Management for answers.