As a general rule, a person who resides in Canada for income tax purposes is subject to Canadian income tax on his income from worldwide sources. An exception to this rule pertains to immigration trusts. Such trusts may provide significant Canadian tax benefits to persons immigrating to Canada by allowing all income generated by the assets transferred to the trust to avoid being subject to the payment of Canadian income tax (on the income earned and capital gains realized) for a maximum period of 60 months (“Immigration Trusts”).
The immigration trust is typically established by a person who has immigrated or wishes to immigrate to Canada (the “Immigrant”). The trust may be settled either under domestic law or under the laws of any foreign jurisdiction. The setting up of the trust may occur sometime in the 60 months after the Immigrant becomes a Canadian resident. However, it is recommended and preferable to set up the trust as soon as possible once the Immigrant becomes a Canadian resident in order to fully profit from the tax benefits arising therefrom.
In order to avoid that the trust be considered a Canadian resident and, as such, be subject to Canadian income tax on its worldwide income, the trust must remain resident outside of Canada. Generally speaking, the trust is resident in the place where its central management and control is situated. For most Immigration Trusts, the trustees are typically resident in a low tax jurisdiction.
The assets that are transferred to an immigration trust vary. In the majority of cases, the assets of the trust will be comprised of investments or real property located outside Canada. Assets of the trust may also be held in a variety of currencies.
As long as the trust remains a non-resident of Canada, it will not be subject to Canadian income tax on most of its income and capital gains. In order to avoid that the trust’s income and gains be taxable in the hands of its beneficiaries, they shall be kept in the trust and added to the capital of the trust at the end of each taxation year. Subject to the provisions of income tax treaties, the income and gains of the trust may be taxable in the country of residence of the trust. Thereafter, it will be possible to distribute these amounts to the beneficiaries, without any Canadian income tax consequences, in the course of subsequent taxation years, as in the case of the original capital of the trust.
The immigration trust will lose its non-resident status at the latest when the Immigrant has been a Canadian resident for 60 months. The 60 month period is cumulative. Accordingly, if the Immigrant, after having become a Canadian resident, decides to sever residential ties with Canada before the expiration of the 60 month delay, there will be no tax consequences in Canada for the trust. If Immigrant then decides to become a Canadian resident at a later date, he or she will continue to benefit from the tax holiday but only until the end of the 60 month period.
At the end of the 60 month period, the trust will be deemed to be a Canadian resident and will be subject to the Canadian income tax regime for the entire then current taxation year. However, the acquisition cost of the properties held by the trust will benefit from a tax increase in order to reflect their market value as of the first day of the taxation year. From that particular period (i.e. the end of the 60 month period), income and capital gains generated by the assets will be taxable in Canada. It is nonetheless possible to terminate and liquidate the trust before the expiry of the 60 month period (i.e. 60 months less a day) in order to fully benefit from the trust and avoid it being subject to Canadian income tax in the course of its last taxation year.
Immigration trusts offer additional benefits, such as the protection of assets against creditors as well as the maintenance of the confidential nature of the financial information concerning the Immigrant. Canadian resident beneficiaries will be obligated to report activities involving a foreign trust, including Immigration Trusts, to the Canada Revenue Agency.
The following example may help illustrate the potential Canadian income tax savings that an Immigrant could benefit from by implementing an immigration trust. If an Immigrant has investments with an approximate value of $2,500,000 in Canadian currency and, assuming an annual interest rate of 5% and a combined (federal and Ontario) tax rate of 49.53%, the following Canadian tax savings will occur:
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