The use of trusts in estate planning can have an impact on certain corporate tax issues such as the ability of companies to claim the small business deduction. If certain companies are controlled in a way described by the ITA they may be forced to share the SBD which is generally not desirable. The issue of control of a corporation can be impacted by provisions in trusts regarding entitlement to income and capital. Therefore, care should be taken to determine the impact a trust structure may have on corporate tax rules and necessary provisions included if available to prevent application of unwanted tax rules.
Trusts can also have an impact on the taxation of corporations, or their shareholders, whose shares it owns in another way. If the trust is found to not be resident in Canada, various tax benefits under the ITA could be lost such as SRED credits and the qualifying small business corporation share exemption (“QSBCS” exemption). These benefits require the corporation to be Canadian-controlled. Even a power of attorney granted to a non-resident can violate the control rule and result in the loss of crucial tax benefits.
As stated in earlier sections, trusts are not legal entities. Instead they are a relationship with respect to property. As result, the process for determining the residency of a trust is potentially somewhat different. One factor is the residency of the trustees of the trust but this is not the final determining factor. The current test is where the trustees primarily conduct the administration of the trust and things like email exchanges can be evidence to answer the question. It is referred to as the “central management and control” test which is also used to determine the residency of a corporation. Having trustees, or a majority of trustees, that are resident in a particular jurisdiction can be helpful, but if they typically deal with the administration of the trust from another jurisdiction then it could be the one that governs for Canadian income tax purposes.
Residency is important not only from a federal tax perspective but also provincially since the various provinces in Canada do not all charge the same rate of tax. The difference of even a few percentage points adds up but caution should be exercised as anti-avoidance provisions could apply if abusive structuring is used to lower applicable tax rates.