Immigration Trusts: A Primer

Overview

Canada, with good reason, continues to be one of the leading destinations for wealthy immigrants from many jurisdictions. Business immigrants not only move themselves, they also move a lot of money. There are no official statistics, but anecdotal evidence suggests that wealthy immigrants invest billions in Vancouver real estate alone every year. Billions more remain offshore, some of it held personally and some in fiduciary structures. Some immigrants become Canadian Citizens, while others are content to remain permanent residents. Some immigrants become Canadian tax residents, others do not. Either way, most of them should consider the implications of Canadian tax laws, not only for themselves but for future generations.

Tax Advantages of Immigrating to Canada

Canadian tax “residents” are required annually to pay tax on global income and, pursuant to “foreign asset disclosure” rules, declare the existence of (but not necessarily pay tax on), certain offshore assets. Canada offers a number of very significant planning advantages. These include:

• The “immigration trust”. The Income Tax Act provides that all income and capital gains linked to assets settled by an immigrant upon and held by a properly structured offshore trust are free of Canadian tax for a period of up to five years. In effect, Canada is a tax haven for the first five years of tax residence.

• For some immigrants the tax free period may extend well beyond five years. The immigrant trust may, subject to limitations imposed by the Rule Against Perpetuities, make permanent distributions on a tax free basis to Canadian tax resident beneficiaries where the settler / contributor of assets either never acquires or abandons tax residency status before the expiration of the 5 year term. In such circumstances Canada, in effect, becomes a permanent, multi-generational offshore centre for wealthy families.

• Immigrants to Canada are not automatically deemed to be tax residents. Some are resident, while some are not, according to their ties to Canada.

• Canadian citizens can shed their tax residency status by severing their linkages with Canada and moving offshore. This will trigger a departure tax giving rise to deemed capital gains. However, there is no departure tax for assets held in an immigrant trust.

• Canada has no estate tax. (There is a “deemed disposition on death” with regards to capital gains, which may trigger some tax.)


The Immigration Trust

Generally, a resident of Canada, whether an individual, corporation, or trust, is subject to Canadian tax on his/her worldwide income. An exception exists, however, for immigration trusts. A properly constituted and administered immigration trust is not resident in Canada. As such, it is not subject to Canadian tax on any of its income, including taxable capital gains, for the first five years. Distributions of capital are also not subject to Canadian tax. Any amounts paid to or for the benefit of a Canadian resident beneficiary, however, are taxable in the hands of the beneficiary.

To qualify as an immigration trust, the following conditions must be present:

• All of the trust’s property must be acquired from a non-resident settler (or grantor);

• The trust must not receive any financial assistance from any person resident in Canada at any time;

• A majority of the trustees must not be resident in Canada; and

• The non-resident trustees must actively exercise their responsibilities as trustees.

Once an immigrant creates an immigration trust, the individual can transfer various foreign assets to the trust. These assets can include cash, real estate, portfolios, and other investments. At the end of the five year tax free period, the trust generally loses its tax-free status and is treated in the same manner as a Canadian resident trust. Depending on the immigrant’s circumstances, however, it may be possible to extend the tax-free status.

In addition to tax savings, immigration trusts can provide other benefits. These include the benefits generally associated with maintaining offshore accounts, and include creditor protection and privacy.

Conclusion

All wealthy people who immigrate to Canada should “tax plan” their way in by retaining experienced tax and immigration counsel to advise on their specific circumstances. There is no “one-size fits all” solution. Every plan should be customized to take into account the particular needs of each family. The absence of proper planning will often give rise to very serious problems with Canadian tax authorities and/or immigration authorities. Proper planning, however, will ensure maximal savings and other benefits to Canadian immigrants.