Immigration Trusts
Temporary Transfers to Canada –
Plan to Exclude Investment Income from Taxation (in Canada)
Persons who take up Canadian residence, are generally taxable on their world income in Canada (and perhaps in other countries) from the moment residence is established. However, by establishing a properly planned Immigrant Trust, you can avoid taxation in Canada on all trust assets (including your entire investment portfolio) for up to five years. If your transfer to Canada will last less than five years, this exemption becomes permanent.
Tax Free Income in Trust
The five-year exemption for trusts was originally intended to allow foreign executives of multinational corporations who were temporarily transferred to Canada to leave their investments in offshore tax havens. But the exemption also allows immigrants who come to Canada on a permanent basis to structure their affairs on a tax efficient basis prior to taking up Canadian residence. The effect of the exemption in section 94 is that an immigrant can defer tax on his or her foreign accrual property income for up to 60 months. This necessarily implies that some individuals who take up Canadian residence, but who subsequently relinquish their residence in less than five years, can completely escape tax on their offshore trust income.
Some Conditions Apply:
A non-resident trust created and settled with property outside Canada is not resident in Canada for purposes of the Act if:
- all of its property is acquired from a non-resident settlor;
- it does not receive any financial assistance from any person resident in Canada at any time;
- its non-resident trustees constitute a majority of the trustees; and
- the non-resident trustees actively exercise their responsibilities as trustees.
If the above conditions are satisfied, section 94 of the Act does not apply and the trust is not deemed to be resident in Canada. Such a trust is not subject to Canadian tax on any of its income (including taxable capital gains) that the trustees resolve to accumulate offshore in each year. Any amounts paid to or for the benefit of a Canadian resident beneficiary (including taxable capital gains realized or deemed to be realized in any year) are taxable in the hands of the beneficiary. Distributions of capital are not subject to Canadian tax.
The creation of a foreign immigration trust requires careful planning both for tax and non-tax purposes. You must consider the specific structure of the particular trust arrangement, the use of corporations, the source of funds for settlement of the trust, selection of an appropriate tax haven, appointment of trustees and/or a protector for the trust, and set-up and administration fees.
Steps in Establishing an Immigrant Trust:
The following is a brief summary of the steps that would generally be required to implement a foreign immigration trust structure for Canadian income tax purposes:
- The trust would be settled in a tax haven jurisdiction by way of a gift from non-residents of Canada.
- Non-resident trustees and protector would be appointed.
- The trust would be irrevocable and would be discretionary.
- All investment decisions in respect of the trust and meetings of the trustees would occur outside of Canada in the tax haven jurisdiction or elsewhere.
- The trust indenture would provide that the annual income of the trust be accumulated and that the trustees would have the discretionary power to make capital distributions to the beneficiaries.
