PRE-IMMIGRATION TAX PLANNING FOR CANADA
Our team of specialists provides access to an extensive international Private Banking and Trust network with offices in Montreal, Paris, Sofia, Dubai, and Hong Kong. As our client, not only do you have a network of experts at your disposal, you are also assigned a Private Client Advisor in our Investor Immigration Group who coordinates the various specialists and ensures continuity of strategy and service. You therefore receive integrated solutions rather than isolated advice for specific areas.
A person who has never resided in Canada but is about to become a Canadian resident can establish an offshore trust for the benefit of the members of their family. Income and capital gains earned on these Trust assets are specifically exempt from Canadian income taxes for a maximum 60 months.
The Case Study:
Mr. and Mrs. Smith were planning their immigration to Canada. They have been married for less than a year and have no children. An analysis of their net worth revealed cash and marketable securities of approximately $500,000, a jointly owned residential home worth $1,300,000 and shares in a corporation owned 100% by Mr. Smith which holds commercial rental properties worth about $2,500,000.
They were interested in the offshore trust not only to save Canadian income taxes but also to protect their assets and to avoid estate inheritance tax for their future children.
The Solution:
After evaluating the facts, the following plan was implemented:
- The trust deed named Mrs. Smith as beneficiary and contained a provision that allowed the trustees to add children in the future as beneficiaries. Additional beneficiaries will reduce the income tax exposure to Mrs. Smith after the 60 month tax exempt period.
- In Canada, there is no income tax deduction for interest incurred on personal loans and mortgages, therefore, it was recommended that the $500,000 cash and securities held be used for buying their home, car and personal effects.
- The residence in their country of origin was not an ideal asset for the offshore trust. Mrs. Smith is a joint owner of the home and as such, trust assets will be considered reversionary making any future income or capital gain taxable to her. It was decided to keep the home and to rent it out using the net rental proceeds for their everyday living expenses.
Section 48 of the Income Tax Act shelters the rental income by allowing capital cost allowance (depreciation) to be claimed based on the fair market value of the property at the time of their immigration to Canada. The Canadian income taxes ordinarily payable on the rental income without depreciation can be deferred until the property is sold. - The commercial property generating a significant net income was ideal for the trust. However, it was not necessary to transfer title and incur costly stamp duty tax. Instead, all the common shares held by Mr. Smith were transferred to the trust. The trust now controls the corporation that owns the property and will receive and accumulate dividends free of income tax offshore, generated by a positive rental cash flow.
The Benefits
- The home in Canada is fully paid and hasn't any (non-deductible) mortgage interest expense.
- There is no Canadian income tax on the rent collected on the former home overseas.
- There is no Canadian income tax on the rent collected by the corporation, now held by the offshore trust for the benefit of Mrs. Smith. There is no tax on any capital gain on any future sale of the commercial property for a period of up to a maximum of 60 months.
- Beneficiaries can receive free of income tax, capital distributions from the Trust. Income taxes are payable only on income and capital gains incurred by the Trust after the maximum 60 month period or if the Trust distributes income within the maximum 60 month period.
Other Considerations:
New Canadian tax laws require residents to disclose--even if there are no taxes to pay--ownership in foreign property worth over CAN$100,000 and any beneficial interest in, and distributions from foreign trusts.
