The Canadian Federal Budget was released on February 11, 2014. This update covers certain proposals which affect private clients. For a full update on Budget 2014 please see Stikeman Elliott's Federal Budget Commentary.
Canadian Immigration Trust: Gone
In an abrupt change of policy, Budget 2014 proposes to immediately eliminate the immigration trust regime. These trusts have been used for nearly 30 years to mitigate tax on the assets of a new immigrant to Canada.
The rationale in Budget 2014 for repealing the immigration trust regime is that similar "benefits are not available to Canadian-resident persons who earn similar income directly or through a Canadian-resident trust. The 60-month exemption raises tax fairness, tax integrity and tax neutrality concerns."
There is a transitional rule for existing immigration trusts under which the regime will be eliminated at the end of 2014. In order to benefit from the additional year, no contributions can be made to the trust after February 10, 2014 and before 2015. Accordingly, trustees should not accept additions to an existing immigration trust without taking advice in advance to quantify the implications of accepting additional assets into trust.
The proposal appears particularly onerous on individuals who fund a trust within five years before arriving in Canada or within five years after leaving Canada, where the trust has a Canadian resident beneficiary. In this event, the trust will be deemed resident (and taxable) in Canada notwithstanding that the settlor does not reside in Canada. Prior to the Budget, these rules did not apply to persons residing in Canada for less than a total of five years during their lifetime.
In a related development, on the same day as the Budget, the Government also announced an intention to terminate the federal Immigrant Investor Program and Federal Entrepreneurs Program. The Government will replace these programs with new pilot programs that ensure that immigrants bring meaningful benefits to the Canadian economy.
(Private) Offshore Regulated Banks
The Income Tax Act (Canada) (the "Act") contains rules which generally require a Canadian resident shareholder to include in its income its proportionate share of the foreign passive income earned from a foreign affiliate. An exception was provided for regulated foreign financial institutions meeting certain criteria.
Budget 2014 proposes to narrow the exception for a regulated foreign financial institution by requiring that the Canadian shareholder (i) must be a Canadian regulated financial institution; and (ii) have either C$2B of equity or more than 50% of its total taxable capital employed in Canada is attributable to a business carried on by it in Canada. This proposal will apply to taxation years that begin after 2014.
Foreign Investment Trusts
Where a Canadian resident has a 10% or more fixed interest in a foreign investment trust, the trust is treated like a controlled foreign affiliate of the Canadian resident beneficiary who is taxed on their proportionate share of the trust's income determined under Canada's controlled foreign company regime.
New immigrants were not subject to this rule during their first five years as Canadian residents. However, Budget 2014 proposes to remove this exception.
In Budget 2013, the Government set out concerns with the abuse of Canada's tax treaties through treaty shopping. Following a consultation paper and stakeholder comments, Budget 2014 announces a proposal to adopt a general rule to prevent treaty shopping that would be integrated in domestic legislation, not in Canada's treaties. Budget 2014 invites comments (within 60 days of the Budget) from interested parties on such a rule to prevent treaty shopping.
Elimination of Graduated Rates for Testamentary Trusts
Testamentary trusts have been taxed at the progressive marginal tax rate structure in the Act. In Budget 2013, the Government announced an intention to consult with the public on measures to eliminate tax benefits for such trusts resulting from graduated tax rates.
Budget 2014 now proposes to eliminate (subject to two exceptions) graduated tax rates for testamentary trusts so that all of the income of such trusts is subject to the top marginal tax rate (39%-50%, depending on the province of residence). The two exceptions are for: (i) an estate during the first 36 months of its administration; and (ii) testamentary trusts for the benefit of individuals who are able to benefit from the federal Disability Tax Credit. These measures will apply to the 2016 and subsequent taxation years.