On February 11, 2014, the Canadian Federal Minister of Finance (“Minister”) released his 2014 Budget and among the proposals was an announcement to end the so-called “immigration trust” – in some circumstances, immediately.
Background: If a person resident in Canada (for the purposes of the Income Tax Act (Canada) (the “ITA”)) contributes property to a non-resident trust, specific rules in the ITA deem the non-resident trust to be resident in Canada for certain purposes of the ITA. However, a 60-month exemption from these deemed residence rules is available if the contributor to the trust is an individual who is resident in Canada for a total period of not more than 60 months in the aggregate. Where this 60-month exemption applies, the non-resident trust was not subject to Canadian taxation on its foreign-source income.
Citing tax fairness, tax integrity and tax neutrality concerns, the Minister stated that the 2014 Budget proposes to eliminate the 60-month exemption rule.
The Budget materials state that this measure will apply in respect of trusts for taxation years:
- that end after 2014 if (i) at any time that is after 2013 and before February 11, 2014, the 60-month exemption applies in respect of the trust, and (ii) no contributions are made to the trust on or after February 11, 2014 and before 2015; or
- that end on or after February 11, 2014 in any other case.
What this means: The current tax holiday enjoyed by any now-existing “immigration trusts” will expire on December 31, 2014 (assuming that no further contributions are made to the trust by a resident of Canada), at which time such trusts will be deemed resident in Canada for certain purposes of the ITA and will be liable to tax in Canada on their worldwide income.
Effective immediately, no more “immigration trust” structures can be set up for new immigrants to Canada. A Canadian-resident contributor (settlor) to an "immigration trust" will have until December 31, 2014 at the latest to restructure or take steps to otherwise mitigate the impact of these proposed changes.