Jul 31, 2025
Introduction: The Residence of a Trust – Central Management and Control Test
Trusts are a common and effective tax planning tool for the distribution of income amongst different recipients. A trust, which originally arose under the laws of equity, is defined as a relationship where one person, the trustee, holds property for the benefit of another person, the beneficiary.
A trust, generally speaking, is treated as a separate tax entity under the Income Tax Act (Canada). One very common exception is bare trusts, where the beneficiary effectively has full control and ownership of the property in the trust and where the trustee has no active duty other than to hold the legal title of the trust property.
This article primarily focuses on trusts other than bare trusts. For more information on the reporting obligations of bare trusts in Canada, see our previous article on this topic: “Bare Trusts” Not Required to File T3, Schedule 15 for 2024 Tax Year, Says CRA.
In Canada, the residence of a trust is determined by the location where the business of a trust is conducted, generally defined as the place where central management and control are exercised. The test to determine the residence of a trust is called the Central Management and Control test. This concept closely mirrors that used for determining the residence of corporations and has been entrenched by the Supreme Court of Canada in the 2012 landmark Fundy Settlement case.
In Fundy Settlement, the Supreme Court of Canada (SCC) affirmed that the central management and control of a trust, rather than the simple residence of the trustee, determines the trust’s tax residence. The residence of the trustee is a relevant factor but not determinative of a trust’s tax residence. While trustees typically manage and control the affairs of a trust, the SCC noted that this is not always the case in practice. Thus, in certain circumstances, a trust may be found to reside in a country other than where the trustee is domiciled if the central decision-making authority of the trustee is exercised elsewhere.
A good example will be if a trustee normally resides in the United States but the trust property includes only Canadian rental properties contributed by a Canadian tax resident. The trustee hires a lawyer and an accountant in Canada to manage the trust and hires a Canadian property management firm to manage the properties. The trustee also travels to Canada to meet with the professional advisors of the trust and makes decisions about the trust while the trustee is physically present in Canada. Even if the trust agreement was entered into outside of Canada, the trust is then likely considered to be a resident in Canada for tax purposes since its business is mostly conducted in Canada.
In contrast, if the trust in question is administered entirely in the United States of America, with the sole trustee living, working, and managing the trust from there, then the trust is most likely a non-resident trust for Canadian tax purposes. Accordingly, the trust would not generally be deemed to be a Canadian resident trust and would have no inherent tax filing obligations in Canada. This is especially the case when:
- The trust has no Canadian-sourced income,
- It does not hold Canadian assets, and
- There are no contributors to the trust who are or were recently Canadian tax residents.
New Reporting Rules for the 2023 and Subsequent Tax Years
However, recent CRA amendments to the trust reporting rules, which became effective for taxation years ending after December 31, 2023, introduced expanded trust reporting requirements. These amendments extend the obligation of a trust to file a T3 return in some circumstances for factual non-resident trusts in Canada, when a “resident beneficiary” or a “resident contributor” is involved.
A resident beneficiary is defined as a person who is a beneficiary of the trust and is a Canadian tax resident. However, for a trust to fall within the scope of Canadian reporting under these new rules, a “connected contributor” must also exist. A connected contributor is an individual who contributed property to the trust while resident in Canada or within 60 months of ceasing or becoming a resident of Canada. A resident contributor to a trust means a person who is a tax resident in Canada and has at or before that time made a contribution to a non-resident trust.
In other words, if a non-resident trust has a resident beneficiary or a resident contributor, even if the non-resident trust received no Canadian income, the trust will be required to file a T3 return for its 2024 and 2025 tax years. If a T3 return is filed late, the trust may be subject to a late-filing penalty even if there is no balance owing, at $25 a day for each day the return is late, from a minimum of $100 to a maximum of $2,500.
Tax Obligations of Canadian Beneficiaries Receiving Distributions From a Non-Resident Trust
Whether a non-resident trust itself may be subject to Canadian tax law or not, the same does not automatically apply to a Canadian-resident beneficiary.
Beneficiaries may have their own set of compliance responsibilities, depending on the nature and form of the distributions received from the non-resident trust. Tax residence of a beneficiary is determined on a fact-specific basis: Determining Your Tax Residency Status & What it Means to Be a Tax Resident in Canada.
Distributions During Estate Administration: If a Canadian-resident beneficiary receives a cash distribution directly from an estate (during its administration), this is considered an inheritance and is not subject to Canadian income tax. Moreover, Form T1142 – the Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust – is not required in this instance, provided the estate is still being administered and is not operating as a continuing trust.
Receipt of Assets from an Estate: In some cases, beneficiaries receive non-cash assets (such as real estate, stocks, or investment portfolios) directly from the estate. Although this is still considered an inheritance and is not immediately taxable in Canada, Canadian tax law requires beneficiaries to report their holdings of specified foreign property if the total cost amount exceeds CAD $100,000. This is done using Form T1135. Furthermore, if the foreign property includes shares in foreign corporations, Form T1134 may also be required.
It is important to note that the fair market value (FMV) of the inherited assets at the time of receipt becomes the beneficiary’s adjusted cost base for Canadian tax purposes. When the beneficiary disposes of these assets in the future, any capital gains realized must be reported and may be taxable in Canada.
Distributions from a Continuing Non-Resident Trust: If a beneficiary receives a distribution after an estate has been administered and assets are transferred to a trust that makes ongoing distributions or receives distributions from a continuing non-resident trust, different rules apply. In such cases, the beneficiary is likely required to file Form T1142 for each year in which the beneficiary receives a distribution or is indebted to the trust. If the distribution includes income or capital gains earned by the trust, this may also be taxable in Canada in the hands of the beneficiary.
Additionally, if the distributions include non-cash assets, similar reporting obligations (e.g., T1135/T1134) may arise. The character of the income and the legal structure of the trust must be reviewed to determine whether the income received is treated as foreign trust income, capital gains, or otherwise.
Given the complexity and sensitivity of these matters, beneficiaries should be advised of their potential tax obligations and encouraged to consult with a Canadian tax professional shortly after receiving trust distributions or before the return filing deadline for the year during which the trust distributions were received.
Pro Tips – Obtain Legal Advice When A Non-Resident Trust is Involved
The residence of a trust under Canadian tax law hinges on where the trust’s central management and control is exercised, not merely the residence of the trustee or beneficiary. Even the physical location of the trust property is not determinative of the tax residence of a trust. The determination of a trust’s tax residence, as a result, can be quite complicated.
Furthermore, if there are any reasons to believe that a non-resident trust may be connected with Canada, a trustee should seek professional advice on the trust’s reporting obligations once it is created. For example, if the trust has a Canadian-resident contributor, the otherwise factual non-resident trust should be filing a T3 return in Canada. A beneficiary that meets the definition of a resident beneficiary may also result in the trust having reporting obligations in Canada. The beneficiary may also have reporting obligations in Canada when the beneficiary receives distributions from a non-resident trust.
The ultimate tax obligations for both the trust and the beneficiary are highly fact-specific. Changes in how the trust is managed or how distributions are made can alter the tax analysis. Therefore, it is advisable to monitor the trust’s activities carefully and seek professional legal and tax advice at appropriate intervals to ensure full compliance with Canadian tax laws.
If you believe that you need advice on the tax treatment and reporting obligations you may have as a beneficiary to a non-resident trust, you should engage with one of our expert Canadian tax lawyers who can help review your tax matters and provide corresponding advice to ensure that you are compliant with Canadian tax law.
FAQ
What is a Non-Resident Trust for Canadian Tax Purposes?
A non-resident trust for Canadian tax purposes is a trust whose central management and control is exercised outside Canada, regardless of where the trustee is formally resident. The Supreme Court of Canada, in Fundy Settlement, clarified that a trust’s residence is not determined solely by the trustee’s location but by where the actual decision-making authority resides.
Generally, if the trust is administered abroad, the trustee lives and works outside Canada, and there are no Canadian contributors or Canadian-source income, the trust will be considered non-resident and not subject to Canadian taxation or trust reporting requirements. This includes cases where a Canadian-resident beneficiary is involved, as long as there is no “connected contributor” (someone who contributed property to the trust while resident in Canada or within 60 months of becoming or ceasing to be a Canadian resident).
As a Beneficiary to a Non-Resident Trust, What Reporting Obligations do I have?
As a Canadian-resident beneficiary of a non-resident trust, your primary reporting obligation arises when you receive distributions from the trust. In such cases, you are generally required to file Form T1142 with the Canada Revenue Agency (CRA). This form must be filed for each year in which a distribution is received or a debt to the trust exists, unless the distribution comes directly from a non-resident estate that is still in the process of being administered. Once the estate is settled and the trust is ongoing, annual T1142 filing becomes mandatory if any amounts are received.
In addition to Form T1142, if you receive or hold specified foreign property through the trust—such as real estate, investment accounts, or shares of non-Canadian corporations—and the total cost of these assets exceeds CAD $100,000, you must file Form T1135.
If these assets include interests in foreign corporations, a Form T1134 may also be required. While receiving an inheritance from a non-resident trust is generally not taxable at the time of receipt, you will be deemed to acquire non-cash assets at their fair market value, and any gains realized upon their future sale must be reported and may be taxable in Canada. Therefore, it is essential to maintain detailed records of all distributions and to consult a Canadian tax lawyer to ensure full compliance with your reporting obligations.
I’m an Administrator/Executor of a Trust that is a Non-Resident in Canada. What Reporting Obligations does the Trust Have in Canada?
A factual non-resident trust generally has no Canadian reporting or tax obligations as long as it meets certain key conditions. Specifically, the trust must have no Canadian-source income, no Canadian assets, and no “connected contributors”—meaning no one who contributed property to the trust while resident in Canada or within 60 months of becoming or ceasing to be a Canadian tax resident. The location of the trust’s central management and control (i.e., where decisions are made and carried out) is the primary factor in determining its residency. If that control is exercised outside Canada, the trust is likely considered non-resident for Canadian tax purposes and will generally not be required to file a T3 return.
However, new Canadian reporting rules effective for tax years ending after December 31, 2023, have introduced potential filing obligations for non-resident trusts if they have a Canadian-resident beneficiary and a connected contributor or if the trust has a Canadian-resident contributor. If you believe that the trust you administered may have Canadian reporting obligations, please consult with one of our expert Canadian tax lawyers for advice specific to your case.
Disclaimer: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
