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Fall 2007
Volume 7, Number 3
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting and TSG member firms cannot assume any liability for persons who act on the basis of information contained herein without professional advice.
Moving to Canada — Some Tax Aspects
By Arnold Sherman, CA, CTA, TEP, FCA (England and Wales)
H. Arnold Sherman Professional Corporation (Calgary)
Canada remains a popular destination for immigrants. Accordingly, I discuss below, in non-technical terms, some tax considerations when an individual moves to Canada and becomes a Canadian resident for tax purposes.
In practice, there are two likely scenarios:
- The immigrant ("Laurel", in this article a single woman) contacts a Canadian tax adviser ("Hardy") by phone or email from her home country, or during a visit to Canada while still a non-resident. She has not been resident previously in Canada, or
- Laurel arrives in Canada as a resident, and later presents herself to Hardy and says, "Here I am. What can you do to minimise my Canadian taxes?"
In the second case, little can be done, except perhaps to set up an immigration trust, discussed below. I shall deal primarily with the immigrant who gives a Canadian tax adviser the opportunity to review the tax aspects of the move before the move occurs.
Residence
Hardy should ask Laurel questions to confirm whether (and the date on which) she will become a Canadian resident for tax purposes. If she is moving from a country with which Canada has a double tax treaty, Hardy should refer to Article 4 of the relevant treaty and review the definition of resident in the context of Laurel’s circumstances.
If Laurel is arriving from a non-treaty jurisdiction (for example, Hong Kong, Taiwan, Colombia, Greece or Turkey), Hardy must consider the possibility that his client remains a resident of her former country, and so is a dual resident. Hardy should discuss this with Laurel’s tax adviser in her former country of residence.
Dual residence can result in double taxation, and Laurel may be able to avoid the situation by taking appropriate steps. For example, she might be told to dispose of her former residence when she moves.
Immigration of a US citizen
If Laurel is a U.S. citizen, she remains liable to U.S. income tax on her world-wide income. Consequently, a myriad of different considerations apply, which are beyond the scope of this article.
Hardy must consult an experienced U.S. tax adviser and work with the adviser to arrive at the best solution. Offshore trusts can cause tax problems for U.S. citizens; sometimes a U.S. resident immigration trust can be a solution.
Temporary Residence "Nowhere" If the tax laws of the country from which Laurel is emigrating provide that Laurel becomes non-resident when she leaves that country or possibly even earlier, she has the possibility of short-term residence "nowhere". To do this, she would visit a jurisdiction that does not tax individuals spending a short time there, before becoming a Canadian resident.
Depending on tax legislation in Laurel’s former country of residence, there may be tax saving opportunities for Laurel while resident "nowhere". For example, certain income received during that period may not be taxed anywhere.
For this approach to be effective, advance planning is essential, as well as coordination between Hardy and Laurel’s foreign tax adviser.
Property Owned by Laurel on her Arrival Date
The starting point for most assets owned by Laurel on the date she becomes resident here is their fair market value at that date. This means that only the gain or loss between the date Laurel becomes a Canadian resident and the date the property is sold will be taxed. There are exceptions for so-called "taxable Canadian property", which includes Canadian real estate and shares in Canadian private corporations.
The valuation of quoted stocks is obviously not a problem. For other assets (for example, foreign real estate or foreign businesses), consideration should be given to obtaining a formal valuation at Laurel’s arrival date.
If Laurel leaves Canada permanently within 60 months of becoming resident, a special provision of the Canadian Income Tax Act ("ITA") exempts any deemed capital gain on her departure for assets she owned on her arrival date.
Pre-Arrival Planning
All income that Laurel receives on or after the date that she becomes a Canadian resident will be subject to Canadian tax. She should therefore try to receive all significant income while she is non-resident. For example:
- Bonuses from a former employer, and any other lump sum payments related to her foreign employment, should be received before she becomes a Canadian resident, as should any lump sum pension payments.
- One way of handling accrued bank interest is for Laurel to close out her interest-earning bank accounts while non-resident. This usually results in income being credited to the account on the date the account is closed. Laurel can immediately transfer the balance to a new bank account.
- Interest on her investments may be payable after Laurel’s arrival in Canada. These investments could be sold while she is non-resident and repurchased after the payment date.
- Laurel should consider postponing the payment of tax-deductible expenses until after she becomes resident in Canada.
- Hardy might bill Laurel for his professional services before she becomes resident in Canada. This avoids GST on his fee.
- Existing stock options, vested or non-vested, may present problems. Hardy will need to work with Laurel’s foreign tax adviser to determine the most effective way of minimising the total (Canadian and foreign) tax cost of exercising the options and avoiding double taxation. Alternatives include exercising the options before arrival, waiting until Laurel is resident here, or exercising them while she is resident "nowhere". With a cooperative employer, it may be worth looking at the possibility of cancelling the options and replacing them with equivalent, but more tax-efficient, remuneration.
Foreign Source Income and Foreign Accrual Property Income ("FAPI")
In general, foreign source income earned after Laurel’s arrival will be subject to Canadian tax, with a foreign tax credit to offset any foreign tax paid on that income. However, reference must be made by Hardy to the relevant double tax treaty, which may limit or eliminate the taxation of some items of income (e.g. certain pension payments), and govern the calculation of the foreign tax credit.
If Laurel controls a foreign corporation which earns "passive" income, such as interest and portfolio dividends or rental income, the income of the corporation will be taxable to her personally on an ongoing basis once she becomes resident in Canada. There is an exception when the "passive" income is ancillary to business income. Hardy should consider alternatives – for example, putting the shares of the foreign corporation into an immigration trust, or liquidating the corporation and transferring its assets to an immigration trust.
Immigration Trust
A five year "immigration trust" may provide a significant benefit for Laurel.
Generally, if a Canadian resident contributes to a foreign trust, the trust will be taxable in Canada. However, there is an exception for new arrivals. Such persons may set up an offshore trust (usually in a no-tax jurisdiction), transfer assets to it, and take advantage of a special provision of the ITA which provides for the income of the trust to be exempt from Canadian taxation for a maximum of five years.
If the trust is settled before Laurel becomes a Canadian resident, the full five year exemption may be claimed.
At the end of the five year period there are various possibilities. For example, the trust may distribute the assets to the Canadian resident beneficiaries, who will acquire them at their fair market value at the date of the distribution. The trust may become a Canadian resident trust on the fifth anniversary date by replacing the offshore trustee with a Canadian resident trustee. The adjusted cost base of the assets of the trust will be their fair market value at the date the trust becomes resident here. If the latter approach is followed, consideration should be given to selecting an Alberta resident trustee, so making the trust liable to tax at the top Alberta personal tax rate, which is six or seven percentage points lower than the rate in most other Canadian provinces.
Several technical provisions of the ITA have to be taken into account when the "immigration trust" deed is drafted. Accordingly, a professional with experience in setting up such trusts should be used. Sometimes an immigrant to Canada is already the beneficiary of an offshore trust. In that case, a specialist should be asked to advise on whether the trust could operate as an immigration trust. If not, what changes to the trust deed are required?
It is essential to consider the financial consequences of setting up an immigration trust. The tax potentially saved over the five years must be compared with the cost of setting up and operating the trust for the same period, before a final decision is taken.
It is essential that an immigrant trust be non-resident. For this purpose, the residence of the trustees is the deciding factor. Normally a professional trustee should be appointed (usually a trust company).
The immigrant who seeks advice after arrival
Most of the suggestions above do not work if Laurel waits to contact Hardy until after she has become resident here.
The immigration trust is still available, but not for the full five year period. Depending on how long Laurel has been resident, it may be available only for four or even fewer years. In some cases, this will reduce the potential tax saving below the costs of setting up and operating the trust.
Conclusion
A number of tax-saving possibilities may be available to the immigrant who seeks professional advice in Canada before becoming resident here. Many of the tax planning opportunities are either impossible or much more difficult to implement after becoming Canadian resident.
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