Canada is a country that is among the best in the world to immigrate to, one that has one of the lowest crime rates in the world. A Canadian passport provides visa-free travel to most countries and allows the holder to take advantage of the North American Free Trade Agreement (NAFTA) providing the ability to live and work in the United States. With proper pre-immigration tax planning, wealthy individuals can avoid income and capital gains tax on their non-Canadian sourced income. In addition, since Canada does not have an estate tax, it is often considered as a favourable domicile of choice.
The Canadian government has several immigration programs. We will gladly discuss these different resources with you in the event that you wish to immigrate to Canada. Suffice to say that in this article we will discuss the content and advantages of the legislation relating to immigration trusts.
Individuals moving to Canada should consider using trusts if they have in excess of US$ 1 million due to the cost of setting up and administering the trust.
The fundamental legislation referring to Canadian Immigration trusts is Subsection 94(1) of the Income Tax Act (Canada). As a general rule a non-resident trust is taxed in the same manner as any other non-resident person.
The objective of Subsection 94(1) of the Income Tax Act (Canada) (the "Act"), the general taxation provision of concern, is to subject certain non-resident trusts to taxation on their foreign source income. Where the non-resident sets up a non-resident trust in favour of Canadian beneficiaries prior to becoming a resident in Canada, the provision of subsection 94(1) will not apply for a period of 60 months, calculated from the time the individual becomes a resident in Canada for tax purposes. During the period the trust is not subject to Subsection 94(1) taxation, the passive income and capital gains earned or realized outside Canada by the non-resident trust would not be subject to Canadian tax. This is commonly referred to as a tax holiday used primarily by newcomers to Canada.
Although an immigration trust enjoys a period of tax-free status in Canada, the tax regime in the trust’s country of residence must be considered. Individuals who receive Canadian citizenship but subsequently relinquish their residence for tax purposes in less than 5 years may completely escape tax on their offshore trust income. In this manner it is possible for foreign earned income and capital gains to never at any point fall into the Canadian tax net.
A non-resident trust created and settled with assets outside Canada is not resident in Canada for purposes of the Act if:
If the above conditions are satisfied, section 94 of the Act does not apply and the trust is not deemed to be resident in Canada. Such a trust is not subject to Canadian tax on any of its income (including taxable capital gains) that the trustees resolve to accumulate offshore in each year. Any amounts paid to or for the benefit of a Canadian resident beneficiary (including taxable capital gains realized or deemed to be realized in any year) are taxable in the hands of the beneficiary. Distributions of capital are not subject to Canadian tax.
The creation of a foreign immigration trust requires careful planning both for tax and non-tax purposes. You must consider the specific structure of the particular trust arrangement, the use of corporations, the source of funds for the settlement of the trust, selection of an appropriate tax haven, appointment of trustees and/or a protector for the trust, and set-up and administration fees. In addition to the tax savings, immigration trusts can provide other benefits, including creditor protection for trust assets, reduction of taxes and probate fees on death, and privacy and confidentiality of personal financial information.
The following is a brief summary of the steps that would generally be required to implement a foreign immigration trust structure for Canadian income tax purposes:
It is extremely important that a skilled and knowledgeable individual creates the immigration trust, and that a competent person manages the trust. Failure to do so can result in massive tax penalties. However, a wealthy immigrant can save significantly through a properly administered immigration trust.
Our firm has experience of structuring immigration trusts, and the contacts to administer these investment vehicles soundly.
It is advisable that an immigrant establish the immigration trust prior to becoming a Canadian resident. A trust can still be established after residency, however, the assets transferred into the trust will be deemed to be disposed of on the day they are transferred, and capitals gains from the period between the residency date and transfer date could arise;. If the immigrant’s residency in Canada ends before the 60 month period, the trust will not become subject to Canadian tax.
For more information relating to Canadian Immigration Trusts please contact our Canada Office for a Free Initial Consultation on how to approach your particular challenge.
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