Canada: Immigrant Trusts

A foreigner becomes resident in Canada for tax purposes if he stays more than 183 days in the jurisdiction within any tax year.

A Canadian tax-resident is subject to Canadian tax on his or her world-wide income from the time Canadian residence is obtained. The taxation year of immigration is divided into two parts: the non-resident part in which only Canadian-source income is taxed, and resident part, which is fully taxed.

Non-Canadian property owned at the time of immigration is deemed to have a fair market value on the date that Canadian residency is obtained.

For non-residents with significant wealth and/or sources of income it is advisable to seek Canadian tax advice before immigration to Canada in order to minimize the impact of local taxation.

Traditionally, one of the most commonly used planning techniques for immigrants to Canada who have significant wealth is the formation of an "immigrant trust" in a tax-haven jurisdiction. If properly structured, this will allow investment income earned during the first 60 months of Canadian residency to be exempt from Canadian taxation.

Canadian foreign reporting requirements, in force since 1997, require Canadian residents including expatriates to report if they own foreign property with a cost that exceeds $100,000 (including contingent property rights in stock options) in total; transfer or loan money or property to a foreign trust or closely held foreign company; or receive distributions from, or borrow from, foreign trusts in which they are beneficially interested.

'Immigrant trusts' therefore need to be reported, but their tax status has not (yet) been attacked.

There are some exceptions to the reporting requirements for expatriates:

• property used in an active business conducted by the expatriate;

• an interest in a non-resident trust that was not acquired for consideration by the expatriate (eg a family trust of which the expatriate is a beneficiary but not a settlor);

• an interest in a retirement plan which is a qualified plan in the foreign jurisdiction and therefore qualifies for tax exempt status;

• personal use property of the expatriate, including automobiles, boats and vacation homes used solely for personal use.

For reporting purposes, the assets are measured at their cost amount, but for expatriates it will be fair market value on arrival that matters.

With a view to deterring tax exiles, the CRA currently imposes a departure tax on individuals (including expatriates) seeking to change residence. Individuals who have been resident in Canada for less than 5 years are exempt from departure tax. Under the departure tax all the individual's capital assets are deemed sold at a fair market value on which capital gains tax is payable. In Canada an individual's capital gains are included as part of his annual assessment to income tax.