Tax for Estate Planners: Warning Sign for Residence of Estates
Your estate client emails you. You’ve had her fill out the estates questionnaire. You take a look and see in the sheet: “proposed executor: Chris Martin, London, England”.
The moment you read this, a warning sign should flash in your head: “Potential non-resident estate”. There are significant tax issues that can arise from this, which makes a general understanding of the law around residence important in these circumstances.
Everything’s Not Lost
Typically, for residence matters, you turn first to the relevant treaties, but in the case of trusts (i.e. estates), residence comes from the common law—namely the 2012 Supreme Court of Canada case (Fundy Settlement v. Canada) and the 1906 English case called De Beers Consolidated Mines, Ltd. v. Howe.
The question is the “central management and control” of the estate, or where the estate or trust “really keeps house and does business”.
Importantly, this means residence of an estate is not necessarily determined by the tax residence of the executor—though in practice it probably is. Assuming Chris is actually resident in England, it’s still possible for an estate for which he is the executor, at least under Canadian law, to still be resident in Canada, by the estate keeping house and doing business in Canada.
Fix You
Possible, but not easy.
Mr. Martin might have an e-mail address for estate matters that he only checks on his frequent trips to Canada. Perhaps Chris holds estate meetings only in Canada and ignores estate matters otherwise. This is very important. Any slip-ups and the estate may wind up resident somewhere else.
Needless to say, if you’re keen on the estate being resident in Canada, this approach is not recommended, and the client should not proceed in this manner without a tax opinion.
Rush of Blood to the Head
There are myriad issues if the estate is non-resident. A few are:
there’s a separate reporting regime for the sale of Canadian real estate
Canadian beneficiaries would have to report their distributions from the trust on a form called the T1142 that they may not be aware of
for income to the estate from Canadian assets there would be withholding tax
There’s more, so let’s try and avoid it. And, of course, I don’t even get into issues with US persons here. Without US tax and estate advice, I always avoid appointing US citizens as executors or trustees.
Happy to discuss this, or tax, or Coldplay. I can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.