Like many other jurisdictions, Canada has a set of tax rules aimed at taking the tax advantage for Canadian taxpayers out of holding passive investments through offshore or "non-resident" trusts. As previously discussed in this publication, Canadian non-resident trust rules are the subject of a set of recently enacted (but not yet proclaimed or in force) amendments to the Income Tax Act that intended to broaden their application. However, it is significant to note that the "Immigration Trust", long a feature of the Canadian tax system, will continue to be available as a tax-planning device.
The Immigration Trust was originally intended to provide relief to foreign executives transferred to Canada on a temporary basis. Because Canada taxes residents on their world-wide income, a foreign executive transferred to Canada, even on a temporary basis would, in most cases, be subject to Canadian tax on income from all sources, including from passive investments in their home jurisdiction. A properly structured Immigration Trust (and there are many technical "traps" that must be avoided) provides relief from this impact for up to five years being, effectively, the maximum period that such trusts are exempted from the former and the new non-resident trust rules.
The benefits of an Immigration Trust are not limited to foreign executives, however, and can be of benefit to anyone emigrating to Canada, including individuals moving here permanently. The essential elements of Immigration Trust planning are as follows:
There must be a trust settlement by the immigrating individual at some time that is prior to the expiry of the first 60-months of residence in Canada. The settlement of the trust should typically occur prior to the immigrating person taking up Canadian residence. Although the trust can be settled at any time within the first 60-months of residence, if it is settled while the immigrating person is a resident of Canada, the settlement itself will be a realization for Canadian tax purposes and any capital gains that have accrued since the date of immigration will be taxable in Canada.
The trust must be, under normal principles, a non-resident of Canada. This means, at the least, that the majority of trustees is not resident and that the trust is not otherwise controlled by residents of Canada. The trust residence should be established in a jurisdiction that itself does not tax the trust income. The tests for establishing the residence of a trust under Canadian tax law are somewhat fluid; care should therefore be taken in the design of the trust's governance to avoid the argument by the Canada Revenue Agency that the persons who truly control the trust, and therefore the trust itself, are resident in Canada.
The beneficial interests in the trust should generally be discretionary. Further, to avoid Canadian taxation altogether, only trust capital should be paid to Canadian resident beneficiaries since any trust income they receive will be taxable to them in the year it is paid or payable to them.
Proper planning is required to avoid the application of the attribution rules contained in the Income Tax Act. These rules can apply to attribute the income and the capital gains of at trust to the person who has gifted or loaned property to the trust in various situations, including situations where the beneficiaries of the trust are the person's spouse, their children under the age of 18 and other persons who are not at arm's length to them. These attribution rules are of general application and could, in the absence of proper planning, apply to defeat the point of the immigration trust.
The trust may invest its property anywhere. If it invests in Canadian investments, however, it will be liable to pay Part XIII withholding tax on the investment income from Canadian sources.
If the trust can be considered to be carrying on business in Canada or to be disposing of taxable Canadian property, it will also be subject to Part I tax.
Prior to the end of the 60-month period, the trust should consider changing its residence to Canada. This can be done simply by changing the trustees to Canadian resident trustees. For Canadian tax purposes, the trust will have a non-taxable deemed disposition of all of its property and obtain a step-up of the cost base of its property. If there is trust property with inherent losses, consideration should be given to distributing the property to Canadian resident beneficiaries in order to preserve the losses for later realization.
The trust will be treated under Canadian income tax law as a non-resident trust. Canadian resident contributors and beneficiaries are therefore subject to the foreign property reporting rules. Clearly, anyone contemplating a move to Canada, whether on a temporary basis or a permanent basis, should consider establishing an Immigration Trust.