A trust, in its simplest form, is a legal relationship among three parties – the Settlor, the Trustee and the Beneficiaries- in which the Settlor gives property to the Trustee to hold for the Beneficiaries. The administration of the trust property is governed by a trust agreement, which sets out the terms of the trust. Trusts are used for various reasons such as wealth and estate management, asset protection and tax planning.
Under the current tax law regime, when an offshore trust acquires property from an individual who has been resident in Canada for an aggregate period of more than 60 months, it is deemed to be a resident trust and subject to Canadian tax. This mechanism is in place to prevent the Canadians from parking their investments in offshore tax havens.
The exemption for individuals resident in Canada for less than 60 months presents interesting planning opportunities. This five-year exemption was originally intended to allow foreign executives of multinational corporations who were temporarily transferred to Canada to leave their investments in offshore tax havens without attracting Canadian tax. But the exemption can also be utilized by immigrants who intend to take up permanent residence in Canada to structure their affairs on a tax efficient basis. These have become known as “Immigration Trusts”.
An Immigration Trust may be set up before an immigrant becomes a Canadian resident, or within 60 months after taking up residence, although, if the trust is set up after the immigrant becomes a Canadian resident, the tax exemption period is reduced by the length of time during which the individual has been resident in Canada.
There are three major elements to an Immigration Trust:
- The trust is resident offshore, with Trustees resident outside of Canada and all meetings and investment decisions of the trust occurs outside of Canada;
- all of the trust’s property is acquired from the non-resident Settlor, or within 60 months of his or her residency in Canada; and
- the trust is discretionary.
The benefit of an Immigration Trust is that the income earned and capital gains realized by the assets acquired by the trust will be exempt from Canadian taxation for the duration of the applicable exemption period. This may result in either tax deferral for individuals taking up permanent residence in Canada or complete tax avoidance in case of individuals who take up Canadian residence but subsequently relinquish their residence in less than five years.
Upon the expiry of the applicable exemption period, the Immigration Trust will be deemed to be resident and therefore taxable in Canada. At this point, the trust is deemed to have disposed of its assets at their fair market value and then immediately re-acquired the assets at the same value. This is to ensure that the capital gains that have accrued in the trust before it becomes a resident in Canada are not subject to Canadian tax. The subsequent planning upon the expiry of the exemption period requires careful consideration of variety of factors and should be undertaken by a professional.
There are also a host of other non-tax related reasons to establish an Immigration Trust such as:
- Privacy and confidentiality with respect to personal and financial information;
- access to global investment markets and investments that may not be available to Canadian-based accounts; and
- Assets may be held in a variety of currencies.
If you think an Immigration Trust may be an appropriate vehicle for you, ensure to consult a tax professional to determine the most appropriate planning solution for your unique situation.