Canadian residents for tax purposes are subject to Canadian tax on income earned on worldwide assets. As such, immigrants of Canada must consider the tax consequences of their relocation. The CRA has many opportunities for new immigrants that will help with their tax burdens. One of the more important plans that the CRA provides is an immigration trust.
Immigration trusts are not taxable in Canada for the first 60 months of Canadian residency. Any income earned within the trust during this period is exempt from Canadian taxation, which provides significant tax savings for individuals with substantial assets outside of Canada.
Creation of immigration trusts
Immigration trusts have the same properties as a regular trust. They are comprised of a Settlor, a Trustee, and a Beneficiary. The Settlor settles/creates the trust by making an initial contribution. The Trustee is responsible for managing the assets held by the trust for the benefit of the beneficiary. The beneficiary is the person who is entitled to distributions from the trust.
Further, to be considered a non-resident trust of Canada, the central management and control must be located outside Canada. This is achieved when the majority of trustees are non-residents of Canada. An offshore trust company is often employed to act as trustee and manage the trust.
Finally, immigrants must consider the jurisdiction in which to set up the trust. The most important factor to consider is whether the trust’s country of residence has favorable trust tax laws and treaties. Also, you should consider the political and economic stability of the jurisdiction and ensure there is a strong legal framework established in the country. Barbados and Cyprus are two popular locations for immigration trusts.
Functioning of immigration trust
Once the trust is set up and functional, the immigrant will be able to transfer foreign assets (i.e. investments and real property) to the trust. Note that Canadian assets and income earned within the trust will not be exempt from Canadian tax.
To maximize the benefits of an immigration trust, it should be established prior to immigrating to Canada. This way, any income earned during the first 60 months after the date of immigration will accumulate tax-free in the trust. Immigration trusts may be established after entering Canada but a capital gain will arise from a deemed disposition of the assets transferred to the trust. This will be wholly avoided by setting up the trust prior to entering Canada.
Tax benefits of immigration trust
Income earned by assets held in the trust will accumulate tax-free in the trust and can be distributed to the beneficiaries without incurring Canadian tax on the income.
If $10 million earns 5% annually in the trust, at the end of 5 years the value will be $12.5 million. On the other hand, if the $10 million is not held in the trust it will be taxed at 48% in Canada and the total assets in the trust will amount to approximately $11.5 million. So the net tax savings is $1 million.
At the end of the 60 month period, the trust is normally wound up following the distribution of trust assets or the trust becomes a resident of Canada. The trust will be considered a resident of Canada if the control and management is located in Canada. This can be done by having the majority of the trustees being Canadian residents, rather than being non-residents.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.