CASE STUDIES
Tax savings and benefits for new Canadian immigrants
Are you planning to migrate to Canada? If so, you need to know that you can take advantage of tax exemption benefits by setting up an offshore trust (i.e., outside Canada) to hold your offshore assets before you establish your Canadian residency.
As a general rule, the worldwide income of an individual who becomes a Canadian resident will automatically be subject to Canadian income tax1. An exception to this rule, however, is that income generated by foreign investment assets held under an “Immigration Trust” will be exempt from income tax2.
An “Immigration Trust” is a non-resident trust established in a foreign tax jurisdiction that holds foreign investment assets. Thus, in order to be entitled to this tax-free status, the migrating individual must set up a trust outside Canada, and the assets covered by this trust must likewise be outside Canada. This exemption from income tax on revenues earned by the Immigration Trust applies only during the new immigrant’s first five years of residency in Canada. Once the new immigrant has lived in Canada for more than five years, income from an Immigration Trust will be taxable.
To summarise, in order for someone to be entitled to tax exemption on the income from an Immigration Trust, the following conditions must be met:
1. The Immigration Trust is an offshore trust or set up in a jurisdiction outside Canada;
2. At least a majority of the trustees are non-residents of Canada;
3. The investments or assets held by the Immigration Trust are located outside Canada;
4. The immigrant has not resided in Canada for more than five (5) years.
In order to maximise the full extent of the five-year coverage, the offshore trust should ideally be set up before the applicant migrates to Canada. Consequently, if a new Canadian immigrant transfers his or her assets into a non-resident trust, the non-Canadian source of income of such assets will not be taxable in Canada until the new immigrant has resided in Canada for more than five years on a cumulative basis.
Although the income of the Immigration Trust is tax-exempt in Canada, the tax laws of the jurisdiction where the trust is set up must be considered. Since the Immigration Trust must be a non-resident trust, the jurisdiction for the offshore trust must be outside Canada, preferably a tax-efficient jurisdiction or country that is likely to impose minimal or no taxes at all on the income generated by the investments held by the trust.
What happens to the Immigration Trust after the five-year residency? The income from the offshore trust could be subject to tax. If the beneficiaries are Canadian residents, income received from the trust would be subject to tax. We therefore recommend that long before the expiration of the fourth year of residency in Canada, the immigrant consults with a professional advisor to thoroughly review all available options for extending the tax savings benefits beyond the five-year period, or distributing the assets to the beneficiaries with minimal tax liabilities.
Disclaimer: The information and opinion expressed herein were produced by AFP Group as of the date of writing and are subject to change without prior notice. The information provided is not intended to replace or serve as substitute for any legal, accounting, tax or consulting advice, and should be used only in conjunction with appropriate professional advice obtained from a suitably qualified professional who understands the particular factual situation and issues.
[1] Income Tax Act of Canada
[2] Subsection 94(1), Income Tax Act of Canada